What Donald Trump's victory means for inflation

Donald Trump may have won the presidency in part because voters were fed up with inflation. But if he implements many of the policies he proposed on the campaign trail, voters could see prices continue to rise, according to economists, analysts and business owners.

There's a lot of inflationary pressure in his promises, says Simon Johnson, one of the 2024 Nobel Prize winners in economics and a professor at MIT's Sloan School of Business.

Trump said he would impose tariffs of 60% on products from China and tariffs of at least 10% on all imports into the United States. The cost of these customs duties will be paid by consumers who purchase the imported products. The president-elect said he would oversee the largest mass deportation of undocumented people in U.S. history, which could lead to labor shortages in industries like agriculture. He also pledges more tax cuts, which could boost consumption and trigger more inflation.

Together, economists say his proposals could raise the costs of clothing, toys, appliances and food. Trump’s allies have sometimes acknowledged this in the run-up to the election; Elon Musk, for example, has warned of temporary hardship for ordinary Americans as Trump implements his plans, including cuts in government spending.

The cost of tariffs

Trump has consistently advocated imposing tariffs on imported products in an effort to keep manufacturing in the United States. The amounts he proposed reached 60% on products from China, 25% on products from Mexico and 10 to 20% on products. from everywhere else.

While Trump claimed that foreign countries pay these tariffs, in reality the importer pays them, absorbs what he can, and passes the rest on to the consumer. Yale's Budget Lab estimated that Trump's tariffs would initially raise consumer prices by as much as 5.1%.

If consumers cut back on spending, it will create challenges for U.S. businesses. This will increase the cost of the products we sell, which will have a huge impact on our ability to be profitable, says Lanny Smith, founder of Actively Black, a Black-owned sportswear company. Smith attempted to move production out of China to avoid the brunt of Trump's proposed tariffs, but was unable to find quality suppliers elsewhere. Even American factories import fabrics from Asia, which also subjects them to tariffs.

Smith fears raising prices on a public tired of inflation. The consumer is going to be angry with us, he said. They don't understand that if we don't raise our prices, we won't be able to survive.

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Clothing and shoes could see big price increases if tariffs are imposed, says Steve Lamar, president and CEO of the American Apparel and Footwear Association. Unless you're in the military, about 98 percent of everything you have in your wardrobe is imported, he says. If companies decide not to raise their prices, they will practice some sort of shrinking of clothing, such as putting fewer details on a shirt but selling it at the price of a fancier shirt.

It's not just clothing that will see its prices increase if the tariffs are implemented. Many consumer electronics are made in China. They would be affected by the 60% across-the-board tariffs proposed by Trump and their operations are so complex that it could be very difficult for them to move production out of their current locations. Toys and sporting goods could also see big cost increases. The stock prices of companies like Wayfair, Five Below and Dollar Tree have fallen since Trump's victory because these companies import many goods from China. Other clothing companies that import a large portion of their products from China include Five Below, Skechers, Crocs and American Eagle, according to a Bank of America research report.

One thing many people don't understand about tariffs is that they also tend to raise the cost of products made in the United States, says Mary Lovely, a senior fellow at the Peterson Institute for International Economics. . This is because U.S. product manufacturers face less foreign competition and more demand from consumers looking for the lowest price. A 2019 study found that the price of domestic washing machines and dryers increased after Trump's tariffs on imported washing machines. American consumers are most likely in for sticker shock, Lovely says.

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Dan Digres' company MISCO has been making speakers in Minnesota for decades. His father started the company in 1949. He's betting on making products in America, but Trump's proposed tariffs could make that difficult, he said. Digre imports some parts from China to run its business, and the first Trump administration passed a 25% tariff on those parts, putting it at a competitive disadvantage since the tariff on imported speakers was only 7%. A 60% tariff would cause Digre to reconsider manufacturing speakers in the United States. If it built the compound in Vietnam, for example, it would not face tariffs.

We discourage companies like ours from continuing to make products in America if they were punished for getting the parts we need from a global market, he says.

Digre does not see why the country, which has just suffered years of inflation, would want to implement a customs duty, which is essentially the same as adding a tax at the start of its production cycle. This tax cost is now passed on to everyone, he says.

Mass deportations

Trump has pledged to carry out the largest mass deportation in American history and end temporary protected status for some migrants allowed to work in the country. These two policies could have a big impact on what Americans pay for their food.

It's not just farmworkers who would be affected, although about half of all farmworkers are undocumented, says David Ortega, a food economist and professor at Michigan State University. There are hundreds of thousands of undocumented workers in restaurants, food production and the grocery sector, Ortega says. Replacing them would lead to higher labor costs, which would ultimately lead to higher food prices. This could have far-reaching consequences for our food system, he says.

Ironically, the loss of a large portion of the undocumented workforce would mean the United States may have to rely more on imported food products, which could be subject to the tariffs Trump wants to impose on foreign products .

Fiscal and monetary policy

Johnson, an MIT Nobel laureate, believes Trump's tax cut plan will also create inflationary pressures. Tax cuts could free up more money for consumer spending, leading to a new cycle in which too much money pursues too few goods in the economy.

Trump could also try to force the Federal Reserve to cut interest rates. The Fed, which operates autonomously, raises rates to cool the economy and lowers them to help stimulate it. Trump said he believes the president should have a say in how rates are set. During his first term, he pressured the Fed to lower interest rates.

Trump does not have the legal authority to fire Jerome Powell, the Fed chairman, and Powell has signaled that he would step back and continue to operate independently if Trump tried to exert pressure. But Powell's term ends in 2026, at which point Trump could appoint a Fed chair more sympathetic to his view of monetary policy.

There is, according to Johnson, an advantage in that Trump promises big changes in the American economy. The more unstable the world seems, the more investors put their money into safe international assets. This is good for the U.S. dollar because it lowers long-term interest rates, making it cheaper for businesses, individuals, and the U.S. government to borrow money.

He has an incentive to threaten chaos, Johnson says, because it will lower his borrowing costs.

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