Trumpflation is just beginning

“BIDEN INFLATION UP!” Donald Trump posted on Wednesday morning after the January inflation number was published. It rose to a 3 per cent annual rate and posted the largest monthly jump since mid-2023. But this was three weeks into a presidency that Trump repeatedly vowed from day one would reduce prices (not inflation). Some of the increase was driven by the rising costs of used cars, auto repair and healthcare. Avian flu was clearly behind the jump in egg prices, which have now risen by 53 per cent in the past 12 months.

Indeed, eggs have replaced bacon as the lightning rod of US consumer dissatisfaction. But even sliced bacon has crept back up above that average $7 a pound level that sparked such fury in the build-up to the election (having last been that high in late 2023). Don’t get me wrong; we can hardly blame Trump for chicken culls, or lingering supply chain issues with second-hand cars. But he will squarely own the cost increases that he is already putting into the pipeline.

They can be divided into two drivers. The first is the cost of Trump’s trade wars and the effect of labour deportation. The second is the growing climate of policy uncertainty. Both were reflected in the latest University of Michigan’s consumer sentiment index, which fell by about five points in early February — to its lowest point since July. That was Joe Biden’s “will he, won’t he?” moment and also the month that an assassin’s bullet grazed Trump’s right ear. The same Michigan survey showed consumer inflation expectations rising a full percentage point to 4.3 per cent for the year ahead — the second consecutive unusually large increase.

Those same concerns have caused the futures markets to push the sole expected Fed interest rate cut this year from September to December. Just three months ago the markets were pricing in four Fed rates cuts in 2025. My guess is that by April the markets will be squabbling over how much monetary tightening to expect. Trump won’t like that. In addition to blaming Biden for the January inflation number, he called on the Fed to cut interest rates on Wednesday.

Now factor in the 10 per cent duties on all China imports and the 25 per cent tariffs Trump has just slapped on steel and aluminium imports, which will feed directly into higher US manufacturing costs. Deportations of illegal immigrants has not yet reached high levels but their dramatisation on TV, and pictures of deportees in shackles boarding military planes, have had their desired psychological effect on the estimated 11mn illegal immigrants in the US. America is rife with anecdotal reports of workers not showing up in shopping malls and at restaurants, and even withdrawing from the labour force. Undocumented immigrants account for roughly a quarter of seasonal farm workers and at least 15 per cent of the US construction industry.

If you want to lower food inflation and housing costs, the last thing you should do is terrify big chunks of the workforce. Even accounting for the animal spirits that Elon Musk claims he will unleash by closing regulatory agencies, Trump is building the foundations of a renewed surge in US inflation. Then there is the looming US budget showdown. Democrats have one real source of leverage — the debt ceiling.

None of this is a surprise. In 2017, Trump was pushing his tax cuts and other open fiscal spigots into a zero-bound US interest rate environment. His agenda came with no price tag. This time he is operating within a monetary corset. It is an open question whether Trump’s Maga base and the millions of blue-collar voters who switched their vote in November will punish him for failing to conquer inflation, let alone reduce prices. We live in such a distorted information environment that it is hard to predict.

Besides, there are 21 months to go before the midterm congressional elections. The Treasury yield curve and the cost of goods on grocery shelves will meanwhile provide a daily referendum on Trump’s promises. Remember, it was Biden’s inflation — not the promise of Musk being given a supercharged role, nor of Trump’s war of attrition with the judiciary — that got Trump elected. I wonder whether voters will remember this.

I’m turning this week to my esteemed colleague, Chris Giles, FT economics commentator and author of the Chris Giles on Central Banks newsletter. (Click here to get it delivered to your inbox every Tuesday.) Chris, do you share my pessimism about US inflation and the effects of broader policy disruption? If so, what will be the spillover effect on the global economy?

Recommended reading

• Talking of the judiciary, my column this week asks whether Trump is preparing to call the courts’ bluff. “Trump thinks the US electorate gave him an unchecked mandate,” I write. “It follows that any interference in his power — including an Alice-style belief that the US constitution means what he chooses it to mean — amounts to a block on democracy.”

• I would also urge Swampians to watch all 30 minutes of the Musk and Trump Oval Office double act this week, in which the former managed to sound like a semi-literate stoner, while the latter for the most part sat impassively behind his desk. Musk’s four-year-old son, X, provides light relief to his dad’s surreal stream of consciousness.

• For a sober and sobering appraisal of Trump’s “competitive authoritarianism”, please take time to read this Foreign Affairs essay by Steven Levitsky and Lucan A. Way. It is the best I have yet read and all the more powerful for eschewing the hysteria that has crept into much of the Trumpian commentary.

• Do also take the time to find out how discombobulated and blindsided South Africa is by the Trump-Musk attack on its alleged anti-white racism — by my colleague David Pilling. I’ve said it before but Orwell is having a field day. 

• Finally, my colleague Pilita Clark has a bracing reminder that the global climate is not waiting on us to get our act together. I was pleased to see this piece among our most read — a rarity for warnings about climate change. “Never before has the danger of climate change been so evident and the response so cavalier,” she writes. 

Chris Giles responds

The simple answer is “yes”, but it comes with a warning from London I think you might find rather uncomfortable. I apologise in advance. 

There is no doubt that Trump’s economic policies — or rather his instincts as far as we understand them — are bad for global economic prosperity and for US inflation. Tariffs and trade wars throw grit into the global trading system, preventing companies and countries from pursuing the most efficient outcomes. We all lose. The distribution of those losses is variable and the US — as the world’s most closed large economy — is more protected than many. 

Trump’s actions to undermine democratic institutions and to change the rules of the game on a daily basis raise the bar for corporate investment. Companies are less likely to take risks to invest in the US or elsewhere if they cannot be sure they will be able to reap the rewards later. The benefits of rules-based institutions are only appreciated in their absence.  

How big are the effects? Well, back in 2019, the Fed estimated that the effect of trading uncertainty caused by the 2018 US tariffs would knock 1 per cent of global output. This estimate should be taken seriously, not literally, but it shows that policy does matter. 

As you say, you cannot blame January’s rise in US inflation on Trump, but his tariff, immigration and fiscal policies are all inflationary. I suspect any appointments he makes to the Federal Reserve will have similar instincts.

My warning relates to the scars I bear from Brexit. There is no doubt that the UK’s vote to leave the EU also damaged growth and raised prices. It prevented efficient outcomes, raised uncertainty, depressed investment and raised prices through a drop in sterling’s value.

The UK public now accept this to be true — nearly nine years later. But proving it in real time against a government determined to claim otherwise was all but impossible.

Why so difficult? You need to persuade people that outcomes are worse than an unknown world in which more sensible economic choices were taken. Even sophisticated people find counterfactuals difficult to comprehend and to explain. There will be lots of other events occurring that will muddy the waters. Convincing academic studies take years to produce. And modern advanced capitalist economies are extremely resilient and do not simply buckle in the face of idiotic economic policy. 

I am sorry to be the bearer of bad news. I fear you are right, but you will not prove it quickly enough for the American public to prevent the damage.   

Your feedback

And now a word from our Swampians . . .

In response to “The strange political philosophy motivating Musk”:
“In the 1970s, the American economist Mancur Olson (later my dissertation adviser) was trying to explain the stagnation of the British and American economies while Germany and Japan were ascendant . . . namely that stable, unconquered democracies accrue distributional coalitions (trade associations, unions, and the like) that focus more on getting a larger slice of the pie through regulation and protectionism than expanding the pie (my words, not his). Germany and Japan had their social institutions and economies largely destroyed during the second world war, allowing a (mostly) unfettered market (and a lot of foreign aid) to drive growth.

Professor Olson’s theory was and is plausible, but struggles to explain the Reagan & Thatcher Revolutions of the 1980s and the strong growth of the US in the 1990s. But at no point does it suggest handing over the keys to the broligarchs as a strategy for economic growth (see post-Yeltsin’s Russia). It does, however, suggest periodic re-examinations to ask what needs to change for the outsiders to keep up with the insiders.” — Murray N. Ross