Trump’s victory could be disinflationary (eventually)

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The writer is publisher of The Overshoot newsletter and co-author of “Trade Wars Are Class Wars”.

Tax cuts, rearmament, tariff hikes, mass deportations and currency intervention are not textbook policies for bringing inflation under control. Yet Donald Trump’s re-election — alongside unified Republican control of Congress — may eventually lead to slower price increases than if the Democrats had held the line and won in November.

While the Trump agenda could certainly raise inflationary pressures in the next few years, several of its signature items could also create downward pressures on spending and prices. Moreover, even if the immediate impact of the 2024 election turns out to be as inflationary as many economists fear, the longer-term political ramifications could well lead to less inflation in the decades ahead.

Start with tariffs. The point of tariffs is to raise prices of foreign goods so much that US consumers start buying more American-made goods. That could be inflationary, both through the direct effect of higher import prices and by boosting wages and employment for American manufacturing workers.

But tariffs could also be disinflationary. If US wholesalers, retailers and consumers do not switch to buying American, but instead eat the cost of higher prices on imports by paying the customs duties, the tariffs would resemble a tax increase that saps consumer spending power. There would be a one-time jump in price levels, but no persistent acceleration in inflation. Perhaps given Treasury secretary nominee Scott Bessent’s stated goal of shrinking the budget deficit, the longer-term hit to consumption could even be seen as a policy objective. (A 20 per cent tariff on all goods imports would be equivalent to a tax increase worth about 2 per cent of GDP.)

Alternatively, if tariffs increase the perceived relative attractiveness of the US as an investment destination, the resulting dollar appreciation could hold down import prices even as it eats into the earnings of American exporters. That seems to have been what happened in 2018-2019: customs revenues rose, the US manufacturing sector took a hit and inflation remained tame.

Mass deportations as the Trump administration has pledged would be far more disruptive than any tariff, which is why many expect that the plan will increase inflationary pressures. Besides significant spending to carry them out, there is a direct impact on employment costs and availability of labour.

But while expulsions would clearly reduce both US real output and the growth trajectory, the longer-term impact on inflation is less clear. Removals reduce the workforce and the consumer market, with the cumulative impact rising over time as slower population growth lowers the appeal of additional business investment. Moreover, at least some Federal Reserve officials have indicated that this kind of persistent supply shock, unlike one-time tariff increases, should not be accommodated with higher prices.

Even if the Trump agenda makes inflation worse over the next few years, there is still one very good reason to think that it could be lower in the long term as a result of his victory: politicians may be more reluctant to fight future downturns out of fear of voter backlash.

According to exit polls, “the economy” and “democracy” were tied as being the two single-most important issues, by far, with Trump winning 80 per cent of those who prioritised “the economy”. Real consumer spending is above the pre-pandemic trend, household net worth remains elevated relative to spending, and the share of working-age adults with a job remains at multi-decade highs. Despite all this, 68 per cent of voters, according to exit polls, claimed that the economy was either “not so good” or “poor”, presumably because of inflation.

Inflation, and the ensuing backlash against incumbents, may have been global, but it probably did not help the Democrats to have been associated with policies that opponents could (fairly or not) point to as having made things worse. In addition to the macro policy preference for full employment and fast growth, the Biden administration also made a conscious choice to prioritise the interests of unions and environmentalist groups over employers and consumers.

Burnt by this experience, Democrats may overcorrect to restore their credibility in the eyes of voters when they are next in power, prioritising pushing inflation down rather going for growth. It is hard to read the Trump administration’s priority given the array of conflicting signals. But savvy Republicans will be cognisant of the political risks of inflation and wary of facing their own equivalent of 2024. And Trump himself promised to defeat inflation in his inauguration speech. Disinflation may make an unexpected comeback.