54

The frustration over inflation was a major factor in Donald Trump’s victory in the recent presidential election. As Trump prepares to return to office in January, many are left wondering: will his policies help reduce inflation, or will they make the situation worse?

In a Forbes/HarrisX poll conducted before the election, 36% of respondents said inflation was their top concern—more than any other issue. Additionally, a Gallup survey revealed that 54% of voters believed Trump was better suited to handle the economy, compared to 45% who favored Joe Biden. Trump was seen as a “change” candidate capable of tackling high consumer prices, according to economist Bernard Yaros of Oxford Economics.

Now, with Trump on track to take office again, it’s important to examine the current inflation situation and the possible effects of his policies on the economy.

What is Inflation?

Inflation is the rate at which prices for goods and services rise over time. Economists usually measure this through price indices like the Consumer Price Index (CPI), which tracks the cost changes of a wide range of products and services.

The impact of inflation on consumers is determined by how much they spend on various goods and services. Some items, such as housing or food, may have a greater impact on the overall inflation rate because of their larger share in the average consumer’s budget.

Inflation vs. Prices: What’s the Difference?

While inflation refers to the rate of price increases over time, it is different from the actual prices that consumers pay when they shop for groceries or fill up their gas tanks. Inflation shows the percentage increase in prices over a set period, typically measured annually.

Since mid-2022, inflation has been gradually slowing, thanks to factors such as the resolution of COVID-related product shortages, reduced consumer demand after a pandemic-driven spending spree, and a larger labor force that has slowed wage growth. Additionally, the Federal Reserve’s interest rate hikes have raised borrowing costs, discouraging consumers and businesses from spending.

By September, inflation had fallen to 2.1% on a yearly basis, down from 7% in March 2022, almost reaching the Federal Reserve’s 2% target. Meanwhile, core inflation, which excludes food and energy, was at 2.7%, down from a peak of 5.6%.

However, this slowdown hasn’t fully eased the financial strain for consumers. Prices for essentials such as food, rent, and gasoline have risen at a faster rate than overall inflation, leaving a significant impact on household budgets. For example, grocery prices in October were up 22% compared to January 2021, while rent increased by 23.4%, and gasoline prices jumped 27.7%.

For lower-income households, the larger share of income spent on necessities has meant less room for discretionary spending. Despite inflation slowing, many voters still feel financially squeezed.

What Will Inflation Look Like in 2025?

Inflation was initially expected to continue decreasing toward the Federal Reserve’s 2% target by the end of next year. However, with Trump’s economic policies, particularly his trade and immigration strategies, some economists predict inflation may remain higher than anticipated through 2025.

Trump has proposed imposing tariffs as high as 60% on Chinese imports and 10% to 20% on goods from other countries. These tariffs would be much higher than those he introduced during his first term, which aimed to encourage U.S. manufacturing.

Goldman Sachs predicts that Trump will likely settle for a 20 percentage point increase in tariffs on Chinese goods and additional duties on auto imports. Under this scenario, core inflation would fall to 2.4% by the end of 2025—still higher than the 2.1% forecast without tariffs. Other analysts, including those at Bank of America and Nomura, predict inflation will remain between 2.5% and 3% through 2025, well above the Fed’s target.

These projections also account for potential mitigating factors, such as U.S. manufacturers absorbing some of the tariff costs rather than passing them directly to consumers. Companies may shift imports to countries with lower tariffs, and a stronger dollar could lower import prices and reduce the impact of tariffs.

How Will Immigration Affect Inflation?

Trump’s plans to cut down on immigration—by deporting millions of undocumented immigrants and reinstating policies that require asylum seekers to wait in Mexico—could also have inflationary effects. Goldman Sachs forecasts net immigration could fall to around 750,000 annually, down from 1.75 million recently and about 1 million before the pandemic.

The recent increase in immigration helped alleviate labor shortages caused by the pandemic, which had contributed to rising wages and inflation. If immigration is restricted, businesses may struggle to find workers, pushing wages and prices higher, particularly in industries with large immigrant workforces, such as agriculture.

For instance, 68% of farmworkers are immigrants, and 44% of them lack permanent legal status. Limiting immigration could create labor shortages and drive up wages, which would likely contribute to higher prices.

Some economists believe the impact of Trump’s immigration crackdown on inflation will be moderate, while others, like Barclays, warn that the effects could be more substantial.

Will Oil Prices Be Affected by Trump’s Policies?

Trump has also advocated for expanding oil production on federal lands, which could lower gasoline prices. However, this would have minimal impact on core inflation, which excludes food and energy prices.

Oil and energy prices are subject to volatility, driven by global commodity market shifts. The Federal Reserve tends to focus on more stable price changes that reflect domestic consumer and business demand, which is influenced by interest rates.

U.S. oil production is already at record highs, and oil prices are currently at a near four-year low of $69 per barrel. Although gas prices may decrease slightly due to increased production, this is unlikely to significantly affect the broader inflation picture.

Will Prices Ever Fall?

While inflation has slowed, consumer prices typically do not fall significantly. As the population and economy continue to grow, demand for goods and services usually keeps prices elevated. A broad decrease in prices, known as deflation, can signal a weak economy and is often harmful. Consumers may delay purchases in anticipation of lower prices, leading to decreased demand, further price drops, and a potential economic downturn.

While some goods—such as furniture, used cars, and appliances—have seen price declines due to supply chain improvements, they remain significantly higher than before the pandemic. Oil and gasoline prices have also fallen due to weaker global demand and increased production. However, prices for other necessities like groceries and rent continue to rise, albeit at a slower pace.

In the end, although inflation may slow, consumer prices are expected to remain elevated, with inflationary pressures continuing in key sectors of the economy.