Personality traits aside, let’s stick with the economics. I don’t believe that the policies of Republican presidential candidate Donald Trump will, in the final analysis, be any more inflationary if he wins than was the case in his term from 2017 to 2021. Headline and core inflation during that period receded even with tariffs, tax cuts, a smaller immigrant labour market and a fully employed economy.
Here’s why.
For one, the Trump tariffs affect a small share of the economy in the form of imported goods. Yet, the U.S. is a services-sector-dominated economy and what will drive down the consumer price index in the coming year is the long-awaited cooling in the rental and OER (owners’ equivalent rent) data. Even within the goods sector, Mr. Trump only has the capacity to raise tariffs on less than 10 per cent of imports and to do more would require congressional authority. He couldn’t obtain that before and there is nothing to suggest he could do so if he gets re-elected.
Also keep in mind the offsets, which is why inflation did fall in his prior four-year tenure – when he raised tariffs, the U.S. dollar also rose nicely, and this reduced the costs of imports on a broader array of imported items than the higher costs on the tariff products. I question whether the forecasts being published by academic economists that have received a whole lot of attention have adopted a dynamic approach because you cannot look at policy implementation in a static equilibrium model. (Static, or partial analysis, only looks at the initial direct effects without taking into account knock-on or multiplier effects.)
The same is true with cuts to top corporate income-tax rates, which obviously lift aggregate demand, but there is a compensating impact on the supply side from incremental growth in the productive private-sector capital stock. Not to mention that as tax relief bolsters profit margins, the need for the business sector to raise prices diminishes substantially. Moreover, other actions that Mr. Trump took lowered prices during his time in office, such as a 20-per-cent dive in oil prices on the back of expanding domestic energy production – this was critical for the decline in inflation even with tariff increases.
This is not an attempt to support tariffs as an industrial policy and I am agnostic on the political front. This is merely an attempt to respond to what I see as flawed analysis by the legions of economists out there. You can’t forecast in a static vacuum. And to stress this last major point, tariffs are only inflationary if they are boosted every year. The oil-price phenomenon in the 1970s was truly inflationary because OPEC boosted prices sharply every two years.
A tariff increase should be thought of in the context of a one-time price-level adjustment. The extent to which it would ever show up in the CPI data will be determined on how the price shock will be shared among foreign producers, domestic importers and the consumer. And the only way inflation would become embedded is via wages, but in an environment where the unemployment rate is on a rising path, the slack being built up in the labour market should weigh against any truly inflationary wage-price spiral.
Keep in mind that from 2017 to 2021, excluding the onset of COVID-19, the jobless rate was on a downward trajectory and we still didn’t see Mr. Trump’s tariff policy ignite an inflation cycle, though at the onset of his presidency, that was the consensus bet, and for a while, bond yields went up and stayed up. That is, until reality set in and the Treasury market rallied, and we didn’t even need a recession to accomplish that.
David Rosenberg is founder of Rosenberg Research.
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