Trump May Have To Grapple with Returning Inflation

Cutting government spending and calling off the trade war would be steps in the right direction.

More than one issue boosted Donald Trump ahead of main rival Kamala Harris and back into the White House, but inflation was key among them. A federal spending spree diminished the purchasing power of the dollar and sent prices higher, inducing sticker shock among Americans that influenced their choices on Election Day. Now we're seeing indications that inflation is back, and the new administration will have to live up to promises to bring the cost of living under control.

Prices Rise Faster Than Expected

This week, the Consumer Price Index (CPI) came in higher than expected. "The all items index rose 3.0 percent for the 12 months ending January, after rising 2.9 percent over the 12 months ending December," according to the press release from the Bureau of Labor Statistics.

Writing for The New York Times, Jeanna Smialek noted that inflation "showed worrying staying power after volatile food and fuel costs were stripped out — a reminder that bringing price increases under control remains a fraught, bumpy process."

A day later, the Producer Price Index (PPI), which is considered a predictor of future prices for consumers, also showed bigger increases than anticipated. "On an unadjusted basis, the index for final demand moved up 3.5 percent for the 12 months ended January 2025," according to the Bureau of Labor Statistics.

"Another U.S. inflation reading came in stronger than expected," commented The Wall Street Journal. "Wholesale prices rose by 0.4% in January, and the December reading was revised up."

Adding to the sting is that last month's inflation numbers had already delivered bad news. The numbers aren't terrible—certainly not by comparison to the official 9.1 percent inflation rate in June 2022 during the recent surge in prices as the value of the dollar fell. But nobody wants to see their paychecks fall behind rising prices. That was a problem for the Biden administration and contributed to Kamala Harris's loss to Donald Trump.

"In surveys prior to the election, inflation was typically the most commonly cited concern on voters' minds," Johns Hopkins University economist David A. Steinberg commented after the election. "Most voters also thought Trump would do a better job than Harris at bringing prices down."

"Bringing prices down" is a tall order once the value of money has eroded. Trump himself admitted in December of grocery prices that "it's hard to bring things down once they're up." But the new president undoubtedly wants to avoid the discontent rising prices bred under his predecessor, especially since his promise to address inflation was an important part of his appeal. In terms of at least not making things worse, he's off to a decent start with the Department of Government Efficiency (DOGE) and efforts to shrink the size and expense of government. Because that's where things went terribly wrong from 2021–2023.

Government Spending at the Root of the Problem

"Inflation comes when aggregate demand exceeds aggregate supply," economist John Cochrane of the Hoover Institution and the Cato Institute wrote in a March 2024 piece for the International Monetary Fund (IMF). "The source of demand is not hard to find: in response to the pandemic's dislocations, the US government sent about $5 trillion in checks to people and businesses, $3 trillion of it newly printed money, with no plans for repayment."

That Trump may have some hard choices to make is clear from the fact that the trillions in federal spending began on his watch, when COVID-19 erupted while he was in the White House during his first term. President Joe Biden carried that forward with his own spending spree. Back in office, Trump must deal with the consequences of government fiscal irresponsibility in which he played a role.

The DOGE and its cuts are a step in the right direction. A federal apparatus that's not dumping trillions of dollars on the world won't fuel worse inflation. Unfortunately, except for the proposal to eliminate the Department of Education, efforts so far at reducing government expense largely nibble around the edges. And even the Department of Education represents only 3-4 percent of federal outlays.

"The primary problem is entitlement spending and interest payments on the debt," Veronique de Rugy wrote this week for Reason. "Social Security, Medicare, and Medicaid already make up most federal expenditures and drive nearly all projected future deficits."

Entitlements make up about 50 percent of federal spending. Defense spending and "income security" are another 13 percent each, with interest on the debt at 11 percent. Unless you address the big-ticket items, the government isn't getting much smaller or less expensive.

Call Off the Trade War

Adding to the problem is President Trump's affection for tariffs. An economic nationalist, he wants to encourage domestic manufacturing by raising high barriers to imports. That's a guarantee of higher prices for consumers purchasing heavily taxed imports or domestic goods shielded from foreign competition.

Trump in his first term and Biden during his four years embraced protectionism. Erica York of the Tax Foundation warns that "Trump-Biden tariffs have raised prices and reduced output and employment."

Last week, the Federal Reserve Bank of Boston forecast "an additional 25 percent tariff on goods from Canada and Mexico combined with an additional 10 percent tariff on goods from China could add as much as 0.8 percentage point to core (excluding food and energy) inflation." Broader tariffs would further hike prices.

"The resurgence of inflation in 1979 is usually attributed not to the Fed directly stoking the fire, but to 'supply shocks," economist John Cochrane, who penned last year's piece for the IMF, commented this week about inflation. "We may be in for adverse supply shocks from trade."

Cochrane is also critical of the Federal Reserve for being insufficiently aggressive, as he sees it, in raising interest rates after the federal government fueled inflation by dumping new dollars on the economy. But he holds out hope that the new administration's enthusiasm for deregulation, energy production, and artificial intelligence may offset some of the price pressure of trade barriers.

So, what should Trump do to prevent inflation from returning as a problem? He should step up his efforts to slash the government and go after the giants of federal spending. He should also abandon his threats of renewed trade war. Maybe then he can keep his promise to bring prices under control.