Inflation remains stubborn. Could the situation get worse under Trump? : NPR

Inflation has been an economic scourge for many Americans under President Biden — and it could remain a lingering problem under Donald Trump.

Consumer prices rose 2.9% in December compared to last year, according to government data released Wednesday. That’s significantly lower than the U.S.’s four-decade high of 9.1% as of mid-2022. But here’s what’s worrying: This is the third month in a row in which annual inflation has been slowly increasing – not decreasing.

This shows both the progress the Federal Reserve has made in combating inflation, but also the difficulty with which policymakers are struggling to bring it back to the Fed’s preferred target of 2%.

And now economists fear inflation will get worse under Trump. Here are three things to know about inflation.

Inflation hits where it hurts most

Americans have had enough of inflation for some time – and for good reason. Some of the prices that have risen the most relate to essential goods for most households.

In December, gas and food prices were among the main contributors to inflation. Egg prices, which have been pushed up by bird flu, are up almost 37% from a year ago.

Car insurance costs increased 11% from last year. At the same time, gas prices are also on the rise, up 4.4% in December compared to November.

Sarah House, senior economist at Wells Fargo Corporate and Investment Banking, called rising prices “an ongoing challenge for many households.” And she points out that even though wages have generally increased, this trend does not significantly ease the financial burden on households.

“If you look at wage growth over the past year, it still outpaces the overall increase in inflation, but not by much, especially when again considering some of the most frequently purchased items by many households,” she says.

But there is some not-so-negative news. Rent prices, for example, are stabilizing, although that just means they’re not rising as fast as before. Housing prices, which cover rent, rose 4.6% from a year ago, a smaller increase than in recent months.

And prices excluding food and energy products, which are the most volatile, increased by 3.2% in December compared to a year earlier. It was the smallest gain in months for this measure, called “core inflation.”

Investors viewed the slowdown in the core consumer price index very positively: on Wednesday, the Dow Jones Industrial Average jumped more than 700 points at midday.

The Fed is still trying to bring down inflation

However, inflation remains higher than the Federal Reserve wants it to be. And that will likely mean the Fed will have to keep interest rates higher for longer, despite significant progress in reducing inflation from its 2022 peak.

After cutting interest rates by a full percentage point last year, the Fed forecast last month that it would make cuts of just two-quarters of a point in 2025 — and some economists forecast even fewer. upcoming rate reductions.

The Fed nevertheless believes it has room for maneuver. Data last week showed the job market continues to grow strongly, with 256,000 jobs created last month.

This means the Fed doesn’t need to rush to cut interest rates. Instead, it can keep interest rates higher and hope that a healthier economy and rising wages will help offset the pain caused by inflation.

Why Trump could make inflation worse

There’s another major reason some Fed policymakers are hesitant to cut rates: Donald Trump.

Anger over inflation is a key reason many Americans voted for Trump last year — but some of Trump’s economic policies could make inflation worse.

One major concern is his threat to impose tariffs on imports from other countries, which economists say would end up being paid directly by U.S. consumers.

Among the countries named by Trump are three of the country’s main trading partners: Mexico, Canada and China. Tariffs on these three alone could raise prices on a range of products, from cars to oil to electronics.

Omair Sharif, founder and president of Inflation Insights, says Trump’s tariffs during his first term were more targeted and not on “the things you go out and buy at Home Depot on the weekend.”

But this time, Trump is threatening to impose widespread tariffs. If he follows through, the impact would be felt by many households, Sharif said: “It’s more likely than not that you’ll pay higher prices.”

Meanwhile, Trump is also threatening mass expulsions of immigrants, although there is uncertainty over who he will target and how he might do so. It could also drive up prices by increasing labor costs, economists say.

For now, it’s hard to say what Trump will actually do while in office. The country will, however, start to get clues about this soon enough, after his inauguration on Monday.