The remarkable recovery from the pandemic over the past four years was insufficient to keep a Democrat in the White House. With numerous economic winds at his back and a budget-conscious electorate waiting to see what he will do with them, Donald Trump is now making a comeback.
The president-elect has quickly positioned himself as the answer to the economy’s shortcomings, despite the fact that it isn’t flawless.
Numerous households continue to face cripplingly high costs for necessities like housing, childcare, health care, and more. Trump was able to effectively channel these emotions throughout the campaign by holding rallies with huge placards that said, “Trump will fix it…” Within his first year in office, he has pledged to cut energy bills in half and free up more housing by expelling millions of immigrants.
On the other hand, workers’ salaries have generally more than compensated for the increases, and the prices of many everyday items and services have already started to decline significantly. The annual pace of consumer price increases has been below 3% since June 2022, when it peaked at 9.1%. For months, it has been hovering just above the Federal Reserve’s 2% target rate.
However, the most recent indication that the final mile of the inflation road may be difficult is December’s 2.9% reading.
Following a September price increase of 2.4%, the lowest since February 2021, price hikes have increased in the last months of the Biden administration. After a sharp increase earlier in the year, food prices have been rising every month since August. In fact, Trump stated after the victory that it would be extremely difficult to drive supermarket costs down any lower after he had emphasized them nonstop on the campaign trail.
Although they are still somewhat less expensive than they were a year ago, a 40% increase in inflation last month was driven by a spike in energy prices. In a season when utility bills are predicted to increase by about 9% due to higher home heating costs, the increase was mostly driven by gasoline and fuel oil.
Ironically, however, the underlying strength in the job market and the economy as a whole may hinder efforts to reduce inflation.
The Biden administration released a Treasury Department analysis last week in an attempt to solidify its record, highlighting the fact that business, household, and labor market indicators are all at levels typical of economic booms, with some, such as the median household wealth, business applications, and the prime-age (ages 25 to 54) labor force participation rate, at or near historic highs.
In the past, Fed monetary regulators have lowered interest rates to boost a faltering economy, and they are undoubtedly keeping a careful eye on those actions. Although things are going well overall, they are well aware that making too many changes too quickly could reverse hard-won gains and drive up costs once more.
The policies that Trump enacts soon after taking the oath of office for the second time will also determine what happens next.
He has stated that his proposals for a tax and immigration crackdown are his main concerns. Business executives are excited about the former, particularly proposals to combine deregulation with a reduced corporation tax rate.Trump’s promise to imprison and deport millions of undocumented people, according to economists, may rock key businesses that depend significantly on immigrant labor, including construction, healthcare, and agriculture.
Another wild card that might escalate diplomatic relations with both allies and adversaries is Trump’s tariff plans, which could also increase costs for companies ranging from internet startups to craft breweries and bicycle manufacturers. Market analysts are lowering their forecasts for the Fed’s rate decreases in light of these unknowns.
In reference to the rate-setting Federal Open Market Committee, Wells Fargo economists recently wrote in a note to clients that they believe the FOMC will remain on hold for the next few months due to the resilience of the U.S. labor market, stickiness in inflation, and uncertainty arising from federal economic policy.
Even the Fed is on hold for the remainder of the year, according to BNP Paribas economists. They wrote to clients, “We continue to expect no cuts in 2025 based on an inflationary upsurge from the new administration’s policies.” As a result, borrowing costs for credit cards, auto loans, and other rates based on the Fed’s benchmark would remain uncomfortably high. Additionally, the yield on 10-year Treasury notes, which serve as the basis for mortgage rates, has been increasing.
Then there’s just the general sentiment of the country. The majority of voters trusted Trump to manage the economy more effectively than his predecessor. Even though there have been long-standing partisan differences on the issue, he will have a difficult time changing the constantly pessimistic perspective that millions of people share.
Greg Valliere, chief U.S. policy strategist at AGF Investments, stated that although most people disagree, inflation is improving. Conflict between Trump and Fed Chair Jerome Powell, whom Trump has stated he won’t attempt to oust from the position before Powell’s term ends in May 2026, is another possibility, he noted.
According to Valliere, Trump certainly anticipated receiving a few interest rate decreases in 2025, but he might only receive one or two. If the Fed doesn’t lower rates, the animosity between him and Powell could resurface.
However, context is important. Kevin Gordon, an investment analyst at Charles Schwab, said that overall, inflation was 2.9%, which was lower than the long-term average of 3.5% and slower than the 3.3% full-year forecast for 2023.
Although that is a positive tendency, it can be challenging for people to observe what is happening in the communities where they live, work, shop, and cast their ballots, or for politicians to stick with their promises of change after winning office.