His policies might drive prices higher again
Inflation has since come down to levels close to normal thanks in large part to a steep rise in interest rates. But in an ironic twist, some of Trump’s own policies – which he heavily promoted on the campaign trail – could send inflation soaring once more if enacted.
Specifically, economists caution that his proposed policies on tariffs, immigration and taxes may do more to exacerbate inflation than curb it.
In my introductory economics classes, I teach my students about the unintended consequences of policies and how they can sometimes be counterintuitive. Common-sense economics often falls short, and this is evident in several policies proposed by Trump, where the expected outcomes may not align with their actual impacts.
Stagnant real wages
Exit poll data reveals that Americans felt the sting of rising prices in recent years, as inflation-adjusted wages strained household budgets.
Even as the Federal Reserve has managed to bring inflation much closer to its 2% target, many Americans continue to describe prices as “too high,” an echo of the past several years’ cost increases that persistently outpaced wage growth.
When inflation outpaces wage growth, the purchasing power of each dollar erodes, leaving workers struggling to afford the same goods and services. This erosion has been felt particularly hard in recent years, but it’s part of a long-term trend of sluggish wages.
Inflation-adjusted wages have been largely stagnant for decades, with certain metrics revealing a dismal reality. For example, the federal minimum wage, created in 1938 and set at US$7.25 since 2009, is now worth less than half of what it was over 50 years ago. Back in the late-1960s, the minimum wage was worth the equivalent of $14.50 per hour in today’s money after adjusting for inflation.
Median weekly earnings paint a similarly bleak picture. Today’s median weekly real earnings for men, adjusted for inflation, are below their level from the mid-1970s. This stagnation has been a critical factor in voters’ recent concerns, with inflationary pressures intensifying the burden on low- and middle-income households.
Trump’s campaign promised swift action to end what he called the “inflation nightmare.” But the following three Trump’s economic policies may have the opposite effect of what his supporters hope for.
1. Tariffs: Americans usually pay the bill
Protectionist policies, such as tariffs on imported goods, tend to increase costs for consumers by limiting supply and raising prices.
In Trump’s first term, tariffs on Chinese imports caused domestic prices to increase across various sectors, from consumer electronics to agricultural products. His renewed interest in protectionism could exacerbate inflation by restricting competition and limiting the availability of affordable goods.
In his second term, Trump has said he would increase tariffs on Chinese goods to as high as 60%, tariff rates significantly higher than the 7.5%-25% imposed on China during his first term.
Many voters express support for tariffs, often viewing them as a way to protect American jobs and industries from foreign competition. However, many might not realize that tariffs function much like sales taxes and are ultimately paid by American consumers rather than the countries exporting goods to the U.S.
Here’s how tariffs work: When the U.S. imposes a tariff on imports, it essentially adds an extra cost to those foreign goods. This cost is passed along the supply chain, leading to higher prices for American companies and consumers who buy these products.
Economists widely agree that tariffs can drive inflation by increasing consumer costs and limiting the availability of affordable options. This basic lesson from Economics 101 underscores how protectionist policies like tariffs, while appealing in principle, often bring unintended consequences for everyday shoppers.
In addition, imposing tariffs on imports risks retaliation from other countries, which may impose their own trade restrictions on U.S. exports. This can reduce demand for American goods, especially in industries like agriculture and manufacturing, slowing economic growth and potentially leading to job losses.
For example, in mid-2018, the U.S. and China engaged in a series of escalating tariffs on each other’s goods, targeting billions of dollars in imports and leading to reciprocal trade restrictions that significantly hurt both economies. A series of studies highlighted the costly economic toll of the U.S.-China trade war, including estimated job losses of nearly 300,000.
In short, tariffs could backfire, hurting both our exports and economy.
2. Deporting millions of migrants could create a labor shortage
Trump’s plan to deport millions of undocumented immigrants also may unintentionally drive inflation higher, as employers across key industries like food production and hospitality would likely face a labor shortage.
Immigrants play a vital role in these sectors, often taking on roles that are difficult to fill. For example, immigrants make up a significant portion of the workforce in agriculture, food processing and hospitality, where they perform essential tasks to keep costs low for American consumers. And they play a key role in the construction industry, including in building new homes.
If deportations proceed as proposed, employers in these industries may be forced to raise wages to attract new workers or lower the supply, leading to higher prices. These added expenses would ultimately trickle down to consumers, increasing prices on everyday items like fruits and vegetables, as well as services like dining out and hotel accommodations.
In short, the loss of this critical workforce could contribute to inflation, making basics like groceries and restaurant meals more expensive for American households.
3. Tax cuts risk fueling too much demand – and price hikes
Economists are also worried about the inflationary impact of tax cuts.
Trump’s tax plans include extending the trillions of dollars in cuts his administration signed into law in his first term – most of which are set to expire in 2025 – and eliminating or reducing other taxes.
While cutting taxes can temporarily boost disposable income by increasing the money households have on hand, it can also drive up inflation by increasing what economists call “aggregate demand” – that is, the total demand for goods and services across the economy.
When this rises sharply, it can put pressure on prices, especially if the supply of goods and services can’t keep up. This imbalance risks fueling inflation, as businesses raise prices to keep up with the surge in demand.
This dynamic is similar to what we observed after the COVID-19 pandemic, when pent-up desire to buy goods and services — built up after months of lockdowns and restrictions — was unleashed. Households, eager to spend, drove up demand in areas like travel, dining and consumer goods.
But businesses faced challenges: supply chain disruptions, labor shortages and limited production capacity. With demand outpacing supply, inflation soared as prices spiked in many sectors.
Could the ‘inflation nightmare’ return?
Expectations that inflation is once again on the rise could have another result that would be painful for consumers: higher interest rates.
The pace of inflation came down from about 9% in the summer of 2022 to 2.4% in September 2024 after the Fed began aggressively hiking its benchmark interest rate. By driving up borrowing costs on everything from car loans to mortgages, the Fed forced many consumers to cut back on spending and priced many Americans out of the housing market.
The drop in inflation, coupled with concerns about the strength of the economy, prompted the central bank to switch course a few months ago and cut rates twice by a total of 0.75 of a percentage point, bringing some relief to consumers. But if the Fed believes inflation is headed higher due to these new policies, it may have to reverse course again and raise rates to fight it.
This, of course, would make it harder for Americans to afford a home – especially when coupled with a labor shortage in the construction industry.
Taken together, many of Trump’s proposed policies may inadvertently fuel another “inflation nightmare.”
Veronika Dolar, Associate Professor of Economics, Pace University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
