This discussion focuses on the economic consequences of Trump’s presidency for the U.S. inflation outlook
There remains considerable uncertainty about the actual impact of Trump’s policies on the U.S. economy. Many of his campaign promises point toward inflationary pressures, though it’s still unclear which policies will ultimately be implemented.
I’ll continue to share relevant studies and provide my own assessments as we gain more clarity on the direction and effects of these policies
Donald Trump has proposed several policies that, in theory, could contribute to higher inflation. These include:
Trump has proposed universal tariffs of 10% to 20% on all imports, a targeted 60% tariff on Chinese goods. However, recently only pledged 25% tariffs on imports from Canada and Mexico, along with 10% on additional Chinese goods.
It seems unlikely that Trump will implement a universal 10% tariff. Instead, he is more likely to target specific countries, such as China, Europe, and Mexico. This approach appears to be strategic, using tariffs as a bargaining tool for negotiations on broader issues. As a result, the actual tariffs imposed will likely be lower than the initially proposed levels.
But since he will need tariff revenues to offset some of the tax cut initiatives, is most likely that some levels of tariffs will indeed happen.
Even if tariffs were to affect only 25% of all imports (almost 1 trillion), the impact would still most likely result in a range of 0.25-075% price increase in inflation. ( However, the analysis is probably more complex than simply applying a proportional increase to the affected goods based on the 2 research above)
This would be a one-time effect, with the effects likely materializing within a year of their implementation.
These are some of the conditions that could offset these inflationary impacts:
With core PCE currently at 2.8%, tariffs alone could keep inflation high between 2.5% and 3%, or even push it above 3% in 2025/2026 depending on the scale and severity of the tariffs imposed, and the reaction on inflation expectations
Trump’s proposals, particularly his tax cuts, could significantly increase debt and fiscal deficits while also stimulating the economy by leaving more income and profits in the hands of households and businesses.
Most of these proposals will require congressional approval. With Republicans controlling both chambers, their chances of success are higher. However, implementation is likely to take time, and even within the Republican party, there may be resistance to policies that significantly worsen the fiscal situation.
According to The Committee for a Responsible Federal Budget, Trump’s policy plans could:
Research from the Bank for International Settlements shows that the inflationary impact of a fiscal deficit depends on the policy environment:
Given that the U.S. operates with a mix of these characteristics, the inflationary impact likely falls in the middle, around 0.30% for each 1% increase in deficits.
With deficits projected to rise from 6.5% of GDP currently to between 7.7% and 12.2%, this could translate to an inflation increase of 0.3% to 1.8%.
The advantage is that the inflationary effects of rising fiscal deficits are likely to unfold gradually over several years, rather than creating an immediate, all at the same time impact. However, this would add to the inflationary pressures already introduced by tariffs.
Furthermore, higher fiscal deficits in a rapidly growing economy could exacerbate economic overheating, particularly since some policies involve tax cuts also directly boost disposable income and spending.
Trump has proposed a range of immigration policies, including mass deportations, stricter border controls, and the elimination of certain humanitarian programs. However, the feasibility of implementing these measures remains highly uncertain due to logistical and legal challenges, as well as questions about their overall effectiveness if implemented.
According to the Brookings Institute, projections for net migration vary significantly, reflecting the uncertainty:
As a reference net immigrations has been in the range of 3 million annually since 2022.
The impact of these policies on inflation is uncertain, as they could have opposing effects:
Overall, while the inflationary impact of these policies seem less concerning compared to other due to the opposing effects, it also remains one of the most uncertain.
I have the opinion currently that as long as core inflation remains within the 2.5%-3% range (tariffs, deficits and immigration pressure would have to be very light), the Federal Reserve is likely to maintain its current approach of gradual easing or, at the worst case scenario pause rate cuts indefinitely.
However, with core inflation levels above 3% in a sustained manner, the likelihood of a rate hike increases significantly. Such a development would likely trigger a strong negative reaction in financial markets.
Anything below 2.5% would mean more cuts than currently forecasted, which would be bullish for the markets.
Conclusion: There are significant uncertainties surrounding this issue, making it difficult to form a definitive or very certain opinion at this stage. It remains unclear how, when, or which policies will ultimately be implemented, and whether they will be introduced all at once or phased in over time. Even Trump true intentions.
I could see scenarios where the impact could be very light ~0.5% impact, and other where impact is way more significant with over 1.5% effect.
There could even be scenarios where the impact is negative if tariffs and immigrations policies affect growth very significantly.
My current best guess is effects to be in the 0.5-1% range in the 2025/2026 period. Keeping core inflation above target and in levels uncomfortable for the FED
That said, in my opinion, the concern/uncertainty the the market is reacting currently is real, particularly regarding tariffs, the fact inflation is already behaving very sticky, with some upward pressure in recent months, and this combined with the amount of uncertainty about monetary policy too, warrants a more cautious approach moving forward.
With both the Federal Reserve and markets closely focused again on this, any new information or policy action could provoke substantial market reactions in either direction.
Of course, other factors will also influence inflation, including geopolitical tensions, energy prices, housing trends, labor market dynamics, and other fiscal deflationary policies as DOGE. These forces, combined with the potential effects of these proposals, contribute to an increasingly complex and uncertain inflation outlook.
I=5
Trump’s economic team discuss gradually increasing import tariffs to avoid a spike in inflation
