The average inflation rate when Donald Trump was president was 1.9%. During Joe Biden’s presidency, inflation averaged 5.4%. Many voters think of Biden as the inflation man.
However, some prominent investors think future inflation will be worse if Trump wins the 2024 election than if Biden wins. In a June 18 analysis, Goldman Sachs argued that investors should buy gold if they are concerned about the inflationary impact of Trump’s economic agenda if he becomes president.
«We see value in long gold positions as an inflation hedge against geopolitical shocks, including tariffs, Fed tapering risk and debt fears,» Goldman analysts wrote. While they didn’t identify it as Trump’s agenda, those three potential strikes are a clear reference to the economic policies Trump has navigated.
Trump wants to impose a new 60% tariff on all imports from China and a 10% tariff on all other imports. Since the tariffs are taxes paid by Americans, it would increase the costs of a typical household by $1,700 a year, according to the Peterson Institute for International Economics. Shoppers would spend more on the same things, which is essentially what inflation is.
Trump also thinks the White House should have more control over the Federal Reserve, a prospect that would alarm financial markets if it ever happened. The Fed has a tough job as it tries to keep inflation and employment at optimal levels, and political interference from the White House could make it that much more difficult.
Trump in particular has pressured the Fed to cut interest rates, even as the standard playbook for reducing inflation is raising rates to slow the economy. If Trump were to win a second term and try to force his agenda on the Fed, it could easily fuel inflation and undermine confidence in the US economy.
Trump also wants to extend a series of tax cuts from 2017 that will expire at the end of 2025. That would increase the national debt by $4 trillion to $5 trillion, something Trump doesn’t seem to care about. But markets do. At some point, the excessive amounts of debt flooding the market become «money printing.» This is another factor that can drive inflation.
Although there are two main candidates, there are four possible outcomes for the 2024 election.
Trump or Biden could each win with their party gaining full control of Congress, or they could win with a divided Congress. This is important because it will determine whether the president can use his party’s control of Congress to pursue a partisan agenda. If the opposition party controls at least one chamber of Congress, it can block many of the president’s favorite policies.
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But if Republicans gain full control, watch out.
«The upside risks to inflation look greater under a Republican purge,» Goldman advised. In addition to higher rates and more attacks from the Fed under Trump, the investment bank notes that a crackdown by Trump on immigration could cut the workforce, worsen labor shortages in some industries, spur higher wages and increase prices.
Another recent analysis from Moody’s Analytics reaches similar conclusions about the economy during a second Trump term. «Policies enacted under the Republican Sweep scenario result in higher inflation and weaker economic growth,» Moody’s Analytics found. That’s largely because new import tariffs and less immigration under Trump would force prices higher and drag on growth.
In a May analysis, Oxford Economics found that Trump’s new tariffs and other policies could push the inflation rate a percentage point higher than it would be without these efforts. Trump’s inflationary policies could also force the Fed to hold off on interest rate cuts and possibly raise rates further to avoid new inflationary pressures. That is likely to anger Trump and possibly force him to try to oust Fed Chairman Jay Powell, whose appointment runs until 2026.
Voters who think back to the Trump presidency as a time of low inflation may wonder how a second term could be so different. The answer is that the COVID pandemic and geopolitical events like Russia’s invasion of Ukraine have transformed the economy and left much less room for error.
The United States and other nations are now «re-supporting» supply chains for major commodity categories, which should make supplies less vulnerable to shocks, but also raise costs. Labor shortages for much of the past three years have pushed up wages, another factor contributing to higher prices.
Global energy markets are also much tighter than they were before COVID. At the time, American drillers and OPEC oil nations were competing for market share, essentially oversupplying the market. This kept prices down. But the drop in demand during COVID led to massive losses and a new «capital discipline» that prioritizes earnings over stocks. Almost no energy producer is willing to overproduce these days, for whatever reason.
While inflation rose under Biden, it is returning to normal levels. Many economists expect more of the same if he wins re-election: continued disinflation, eventual Fed rate cuts, predictable trade policies and moderate growth. The ultimate status quo scenario is a Biden victory with Republicans controlling at least one chamber of Congress, allowing them to block progressive Democratic legislation.
Biden’s economic agenda is still a tough sell to voters, who sometimes have selective memories. Biden is battling a «Trumpnesia» phenomenon in which voters forget Trump’s erratic handling of the COVID pandemic and other controversies and remember only that gasoline costs less than $3 a gallon. If there is another Trump presidency, it may conjure up very different memories.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjewman.
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