The 2024 election will be happening before you know it, and economists are watching it closely.
If Donald Trump wins a second term, some experts say it could affect the trajectory of inflation in the United States: a second Trump term would bring higher tariffs, higher deficits and other policies that would increase inflation. ‘inflation. Although forecasting economic conditions is not an exact science, experts are able to speculate using their knowledge of the past and some clues about the future.
Read more: From Toilet Paper to Discarded Items: 7 Ways Shrinkage Happened to Costco
Find out: How to get $340 a year in cash back on gas and other things you already buy
A new report from Allianz Research provides insight into how inflation could evolve under a Trump 2.0 presidency. The report shows that while certain policies could increase inflation in the short term, the overall trajectory of inflation would be determined by factors such as the actions of the Federal Reserve and broader economic conditions.
GOBankingRates spoke with Maxime Darmet, senior US economist at Allianz Trade, co-author of a recent Allianz Trade research report, titled “Trumponomics: the Sequel,” on this very topic.
A tough battle against inflation ahead
The next president will have his work cut out for him when it comes to fighting inflation. The US economy has been quite robust recently, despite rising interest rates.
“Although the United States has remained remarkably resilient despite rising interest rates and global uncertainty, it has become more prone to inflation volatility, given its greater exposure to frequent supply shocks and structural labor shortages,” Darmet said. “In this context, policies that stimulate demand – such as tax cuts – or policies that harm supply – such as tariff hikes – could revive inflation more quickly and raise interest rates. interest.
Whoever occupies the Oval Office in 2025 will have to exercise caution in their economic plans. Big tax cuts may seem great at first: they put more money in your wallet. But if there are few goods to spend that money on, it can easily overheat the economy and further worsen the inflation spiral.
Read next: Here’s how much the definition of rich has changed in each state
A potential trade war
If Trump returns to the White House, it seems likely that he will double down on his protectionist policies to boost U.S. manufacturing. He proposed tariff increases, including 10% on all imports and 60% on Chinese products.
The Allianz report discusses two potential scenarios: one in which the US tariff rate increases from 2.5% to 4.3%. However, another scenario, in which Trump implements all the tariffs he has threatened, could push the rate to around 12%.
“However, in either case, we would expect Trump to target products that are not essential to the U.S. economy, equivalent to 55% of imported Chinese products and 70% of European products,” Darmet wrote. “China’s textile sector and the U.S. transportation equipment sector would be hardest hit.”
So perhaps cars and electronics remain relatively unscathed, while Chinese clothing exporters suffer the consequences. But even with this targeted approach, the consensus is that it will act as a formidable inflationary bomb. In this case, the report predicts that inflation could increase by 0.6 percentage points.
Budgetary tensions
Of course, Trump wouldn’t exactly be working with a new economic slate if he took over the White House. He would inherit the fiscal situation of Biden’s term.
“A Trump 2.0 presidency would inherit very large budget deficits from the Biden administration and rising interest costs,” Darmet wrote.
Trump’s bold promises to cut taxes and increase spending could quickly run up against harsh fiscal realities. He will have to resort to some clever accounting tricks to realize his economic vision without sending bond market investors into a complete panic about the stability of American finances. One potential strategy would be to raise all those tariffs and trade taxes to finance tax cut promises while scaling back Biden’s more costly policy initiatives.
So unless the Trump 2.0 economy is somehow the best in the world in terms of growth, most forecasters believe the new administration will ultimately have to rein in fiscal easing after perhaps a year of government cuts. taxes or more modest spending increases.
Otherwise, the entire economic program could end up collapsing under the weight of unsustainable budgets and debt – something fiscal conservatives in Trump’s own party would likely refuse to accept. This deficit dynamic is undoubtedly keeping economic advisors up at night as they plan for Trump’s potential second term.
Push national production
Trump said his goal was to accelerate U.S. manufacturing and reduce foreign ties in manufacturing. However, the report suggests that such policies should be designed very carefully.
“To produce benefits, industrial policy must avoid the risk of targeting too many objectives. In this regard, Trump’s ambitious National Strategic Manufacturing Initiative (SNMI) may be disappointing when compared to its many goals and the fact that the United States does not have a competitive advantage in many sectors,” Darmet wrote.
Fed Inflation Balancing Act
The Fed’s response would shape inflation under a second Trump term. “In this context, we expect that the Federal Reserve will be forced to suspend its easing cycle in 2025 and that the US 10-year yield will remain above 4%,” Darmet writes.
This could control inflation but initially weigh on growth and markets. The report highlights the delicate balance the Fed would face between inflation and economic impacts.
More from GOBankingRates
This article originally appeared on GOBankingRates.com: I’m an Economist: Here’s My Inflation Forecast If Trump Wins
yahoo
