When Inflation Matters Even More - 12/16/24

It’s not often that Donald Trump and conventional wisdom are in agreement. But as the assessments, analyses, and post-mortems regarding last month’s elections continue to stack up, that appears to be exactly what is happening.

“I won on groceries,” the president-elect stated on Meet The Press last week, succinctly making the case that inflation was the defining issue that allowed him to defeat Kamala Harris. Most mainstream pundits are in complete agreement. But even in that interview, Trump began trying to lower expectations, suggesting that reducing prices might be difficult to achieve. In subsequent interviews, he has continued to backpedal, making it clear that reducing costs would be “very hard.”

The incoming president clearly recognizes the volatility of the issue, and so he has been stressing how his plan for additional oil exploration will help lower the price of gasoline and that solving supply chain issues would address the affordability of many household goods. (His pledge to keep Federal Reserve Chair Jerome Powell on the job may also be based on the recognition that the disruption of replacing Powell would likely cause higher inflation.)

But the two most powerful tools in Trump’s inflation-fighting arsenal appear to be at odds with two of the most impactful promises he made in his campaign. How he weighs these political considerations against economic realities could determine the fate of both his presidency and the U.S. economy.

Promise #1: In addition to his reference to groceries, Trump also credits his aggressive agenda on strengthening the nation’s borders, especially with Mexico. He has already engaged in a combative discussion with that country’s new president, Claudia Sheinbaum, in which he essentially ordered her to reduce cross-border traffic. The centerpiece of his campaign was a promise to order mass deportations of unauthorized immigrants from the U.S., a stance which is supported by well more than fifty percent of the American people.

The challenge for Trump is that removing large numbers of unauthorized immigrants would decimate the population of the country’s farmworkers, which would dramatically increase food prices, and also greatly reduce the number of construction workers here, which would have a similar impact on homebuilding and housing prices. These are low-paying, difficult jobs that attract few native-born Americans, and the absence of lower-cost labor would have precisely the type of inflationary impact that Trump is trying to combat.

Promise #2: Trump has also called for massive increases in tariffs against foreign goods in order to protect domestic production, a position especially popular in the Rust Belt states that keyed his victory. But higher tariffs also mean higher costs for American consumers, as most retailers in this country would simply pass on the increased costs to their customers. Again, the direct economic impact of this Trump campaign promise may be higher inflation, which contradicts perhaps his most important pledge.

There are other, less dramatic ways for Trump to fulfill these commitments to his voters, both of which would have much less of an impact on prices. If Trump were to limit his deportation plan to those unauthorized immigrants who have been convicted of crimes unrelated to their presence in this country, the result would be a much smaller dislocation. Most of those farmworkers and construction workers would be able to remain in this country, and the threat of significant price increases would recede. Polls show this option to be much more popular with voters as well, and would allow Trump to avoid the wrenching scenes of family separation that undermined his administration’s immigration policy during his first term.

Similarly, there is an emerging school of thought that Trump’s cabinet appointees with experience on Wall Street suggest that he is interested in using the threat of tariffs as a cudgel to browbeat other country’s leaders into unrelated policy action. He made it clear to Sheinbaum that Mexico could avoid higher tariffs by moving more aggressively to curb migration across the southern border, and offered similar indications to Canada’s leaders regarding the flow of fentanyl from the north. A more limited use of tariffs designed to extract other policy concessions would have a less pronounced impact and still allow Trump to tap into the public’s protectionist instincts by bragging about his ability to force other countries to accede to his will.

To say that our next president is not known for his self-restraint is an understatement of historic proportions. But if Trump were to rein himself in on these two policy fronts, the political and economic payoff could be considerable.