When Donald J. Trump became president in 2017, prices had risen by about 5 percent over the previous four years. If he wins the race for the White House in 2024, he will take office at a time when prices will have risen by as much as 20 percent.
It's a very different economic backdrop to the policies — tariffs and tax cuts — that the Republican candidate has placed at the center of his campaign.
Mr. Trump regularly blames the Biden administration for recent price hikes, but inflation has been a global phenomenon since the start of the coronavirus pandemic in 2020. Supply chain problems, changes in consumer spending patterns and other quirks related to pandemic lockdowns and their aftermath collided with stimulus-fueled demand, pushing up costs.
Years of unusually fast inflation have changed the country's economic picture in significant ways. Businesses have become more accustomed to adjusting prices and consumers have become more accustomed to changes than they were before the pandemic, when costs were stable for decades. In addition, the Federal Reserve has raised interest rates to 5.3 percent to slow demand and bring the situation under control.
This combination — uncertain inflation expectations and higher interest rates — could make many of the ideas Mr. Trump discussed during the campaign either riskier or more costly than before, especially at a time when the economy is running at full speed and unemployment is very low.
Mr Trump is suggesting tax cuts that could boost the economy and widen the deficit, potentially boosting inflation and raising the national debt, at a time when it costs the government so much to borrow. He has talked about mass deportations at a time when economists warn that losing too many potential workers could lead to labour shortages and drive up prices. He has promised to raise tariffs across all sectors – and heavily on China – a move that could sharply raise import prices.
and they have indicated that interest rates will be Very little It will be difficult for him to do so during his term because the Fed sets its own interest rates and is isolated from the White House. But if Mr Trump were to successfully infringe on the Fed's independence and try to find a way to lower borrowing costs, it would risk reviving growth and price rises.
The policies Mr. Trump is proposing are an extension of things he has tried before. Tax cuts that added to the country's debt pile, tariffs, immigration controls, and verbal attacks on the Fed that provoked it to lower interest rates were all cornerstones of his first term. Yet the economy's growth makes this a potentially dangerous moment to replicate those policies in a more drastic way.
“It’s one thing when you run expansionary fiscal policy in a world where inflation is low and the unemployment rate is below full employment,” said Mark Zandi, the chief economist at Moody’s Analytics who provides research and analysis to the Biden administration. But this is a “very different economic backdrop,” Mr. Zandi said.
While both President Biden and Mr Trump are expected to run deficits if elected, many economic analyses have suggested that Mr Trump's policy proposals so far would leave a significantly larger budget gap. Researchers at investment bank TD Cowen suggested the choice between the candidates was between “higher deficits” (Mr Biden) and “much higher deficits” (Mr Trump).
There are several reasons why government spending is likely to continue to rise under any candidate: Programs like Medicare and Social Security are only growing too expensive As the population gets older, interest rates go higher, and even Mr. Biden It is suggested He said he would extend personal tax cuts for people earning less than $400,000 — though he has also proposed tax hikes on high-income households and corporations.
But there is a huge difference in magnitude. Moody's It suggests that the budget deficit is likely to stabilize at just over 5 percent of annual output in the coming years if Mr. Biden is re-elected with a divided Congress, rise to 6.4 percent if Mr. Trump wins with Republicans, and rise further to 6 percent if Mr. Trump wins with a divided Congress.
Mr. Zandi, of Moody's, said that if the budget deficit is stable, it will keep the economy on a relatively stable path – but a bigger deficit could send it overheating again.
And annual deficits add to the country's debt pile. Typically, periods of economic strength are seen as an opportunity to reduce deficits to ensure the country's debt remains on a sustainable path.
“I think the minimum principle in charting our fiscal course should be: First, do no harm,” said Harvard economist Jason Furman, who was an economic adviser in the Obama administration. “Absent one-time emergency spending, there's no excuse right now for deficit-increasing measures.”
This underscores an important point: This is not the economy that any candidate essentially inherited.
Mr. Trump took over an economy in 2017 that still had a recovering labor market and low inflation. Mr. Biden oversees an economy in the midst of a pandemic in early 2021. Whoever wins the election in 2024 will face a very different backdrop. The economy is running at or near full capacity, and the Fed is trying to slow it with high interest rates to get inflation under control.
Although the job market has slowed somewhat in recent months, the unemployment rate remains at or above 10 percent. Below 4 percent From the end of 2021, The longest stretch The lowest unemployment rate since the 1960s. However, this situation changed with data released on Friday, which showed that The unemployment rate rose marginally to 4.1 percent In June, this is still a low level by historical standards.
Salary increment Consumer spending is moderating, but it also remains strong. Consumer spending is moderating, but it also remains quite strong by historical standards.
and inflation as defined by the personal consumption expenditure index was 2.6 percent This has declined in the May data. Although it is less than half of the top rate of 2022, it is still higher than the Fed's 2 percent target. Inflation is slowing, but it remains faster than usual and may continue to rise slightly raised According to predictions, this situation will arise when the next President takes office.
Economists say this is what makes Mr Trump's policies worrying.
“The economy is far more at risk of slipping into an inflationary spiral today than it was in 2018, when Mr. Trump launched the trade war,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “This should make us far more cautious about any policy that could potentially let the inflation genie out of the bottle.”
Mr. Strain said he believes tariffs could raise prices, though he doubts they would lead to sustained price increases, and that the deportation of immigrants could lead to inflation by creating labor shortages in some industries — though that would depend on how the policy is implemented.
Mr Trump has promised to increase his use of tariffs by imposing import taxes on nearly all trading partners, including a 60 per cent tariff on all Chinese goods. Studies have concluded that his previous tariffs have raised costs for importers and consumers, and a recent analysis by the Peterson Institute for International Economics found that A new one This is likely to increase the price level of imported goods, and could cause a typical middle-income family to lose about $1,700 per year.
On taxes, Mr. Trump is promising to permanently extend the tax cuts for individuals that are set to expire next year, and he is talking about new taxes. Cuts For tipped workers.
That could boost growth by leaving more money in consumers' pockets than expected. And in a world of higher interest rates, the impact on the deficit could snowball. Mr. Trump's initial tax cuts were financed with borrowed money, and analysts predict any extension or new expansion will do the same.
Congressional Budget Office already guessed Annual interest expenditure on the government's debt could rise to $1.7 trillion by 2034, nearly double today's level. Annual interest expenditure on the government's debt could rise to $1.7 trillion by 2034, nearly double today's level, the budget office has said. estimated If the expiring individual income tax provisions of the 2017 Tax Act are extended, the deficit would be $3.3 trillion higher between 2025 and 2034, and higher interest expense would increase by $467 billion.
When Mr. Trump’s agenda is looked at as a whole, “you can’t have a more inflationary platform than that,” said Kimberly Clausing, a nonresident senior fellow at the Peterson Institute and a former Treasury official in the Biden administration.
One question is whether the prospect of inflationary policies under Mr. Trump will prompt the Fed to raise interest rates — or at least prevent the central bank from lowering borrowing costs, as officials expect to do later this year and again repeatedly in 2025.
Thierry Wiesman, a rates strategist at financial services firm Macquarie Group, said that if Mr. Trump were to win, it “won’t really affect interest rates in the short term.” The Fed will probably lower rates later this year as expected.
But he added that it “will change the trajectory that they see over the long term,” and “will likely lead them to an endpoint that is higher than what we saw before.”
Anna Swanson Contributed reporting.