Trump and Inflation

Alan Cai

November 29, 2024

“It’s the economy, stupid.”

That’s what James Carville, a strategist for Clinton’s successful 1992 presidential campaign said of the election. In 2024, voters also turned to their bank accounts to decide. While Trump — convicted of several felonies and facing many others in court — certainly did not become a more appealing candidate than he was in 2020, inflation drove many voters to the ballot box on November 5th. Although inflation was certainly a major issue that plagued the Biden administration, is Trump necessarily the solution? Let’s examine his possible economic impacts.

On Monday, Trump announced via his social media platform Truth Social that he planned to enact a 25% tariff on all Canadian and Mexican imports and levy an additional 10% tariff on Chinese imports. The tariffs placed on the country’s two North American neighbors may violate the United States-Mexico-Canada Agreement (USMCA) which Trump signed in 2018 to supersede the North American Free Trade Agreement (NAFTA). The USMCA guarantees free passage of goods between the three countries duty-free until it expires in 2036. Trump reasoned that the tariffs would motivate Canada and Mexico to decrease illegal border crossings and coerce China into stopping the influx of Fentanyl into the United States.

Mexican president Claudia Sheinbaum responded on Tuesday by suggesting retaliatory tariffs against its northern neighbor. Mexico is the largest trading partner with America. A trade war between the two countries would only result in higher inflation as foreign-made goods experience more difficulty coming in. Canadian leaders are reportedly also considering launching retaliatory tariffs against the United States. While Trump may not necessarily follow through on his tariff threats upon inauguration, the risk of trade wars increases the likelihood of higher inflation.

The Federal Reserve manipulates interest rates to control the money supply in the economy. When interest rates are low and the money supply is high, the stock market performs well, typically a good sign for US presidents. However, decreased interest rates also lead to increased inflation. While most presidents will not actively pressure the Federal Reserve to lower interest rates, Trump may break the longstanding tradition of Federal Reserve independence. As shown through his nomination of Matt Gaetz to the Attorney General post and his promise to retaliate against Justice Department officials who investigated his various criminal cases, Trump has little respect for defending conventionally autonomous bodies. Additionally, when sitting Federal Reserve Chair Jay Powell’s term expires in May 2026, little stands in the way of Trump nominating another obedient member of his inner circle to fill the role.

Trump will undoubtedly leave a significant impact on the US economy. At the very least, the labor shortage could be exacerbated by his mass deportations and the deficit may balloon under his tax cuts. Nonetheless, voters need to keep him accountable to his campaign promise of reducing inflation and improving the American economy.