Trump’s Return Could Trigger Higher Inflation and Delay Interest Rate Cuts

If Donald Trump were to return to the presidency, his campaign promises—such as cutting taxes, cracking down on immigration, and imposing hefty tariffs on imports—could significantly affect inflation in both the U.S. and around the world.

With a Republican-majority Senate and Trump projected to secure a historic re-election win, as reported by CNN on Wednesday, the former president would be in a strong position to push through his economic agenda, which many economists warn could lead to inflationary pressures.

Following the announcement of Trump’s victory, U.S. stock markets surged, and Treasury yields—key indicators of market interest rates—spiked. The dollar also gained strength against other currencies, partly due to expectations that Trump’s policies could stoke inflation and delay the Federal Reserve’s anticipated interest rate cuts. (A stronger dollar often results from higher interest rates as global investors flock to U.S. assets for better returns.)

Potential for Rising Inflation

Trump’s proposed policies, including tax cuts, tariffs, and a crackdown on immigration, could push inflation higher in the U.S. These measures may also have ripple effects globally, further exacerbating inflationary trends.

1. Tax Cuts: Trump has indicated that he plans to enact significant tax cuts. While tax cuts may boost consumer spending and business investment in the short term, they also risk increasing demand in an already tight economy, which could lead to higher prices.
2. Tariffs: Trump’s proposal to raise tariffs significantly—up to 20% on all imported goods and as much as 60% on Chinese imports—could escalate inflation. Tariffs effectively increase the cost of imported products, which would raise prices for consumers. Businesses that rely on imported raw materials or intermediate goods would face higher production costs, which they might pass on to consumers.
3. Immigration Policies: Trump’s hardline stance on immigration could reduce the flow of low-wage workers into the U.S., exacerbating labor shortages in certain sectors like agriculture, construction, and hospitality. This reduction in the workforce could put upward pressure on wages, which would likely be reflected in higher prices for goods and services.

Global Inflationary Impact

Trump’s economic policies are not expected to just affect the U.S.; they could have serious consequences for the global economy as well:

1. Stronger Dollar: With tariffs potentially raising inflation in the U.S., the dollar could strengthen as investors anticipate higher returns in U.S. assets. A stronger dollar could make U.S. exports more expensive and cause inflation in other countries, especially those that rely on imports priced in dollars. For instance, nations that buy commodities (such as oil or metals) in dollars could see their import costs rise, which would be passed on to consumers.
2. Global Tariff War: If Trump imposes tariffs on other countries, it could prompt retaliatory measures. Countries like China, Mexico, Germany, and Canada, which export heavily to the U.S., could face higher costs and lower demand for their goods. A global trade war could not only dampen global growth but also drive up inflation across the world, with higher costs on both raw materials and finished goods.
3. Disruptions to Global Supply Chains: The imposition of new tariffs could strain supply chains, especially for businesses that rely on inexpensive imported materials. If companies face higher production costs, they may be forced to delay or reduce their output, further contributing to inflation and supply shortages worldwide.

Impact on the U.S. Federal Reserve and Interest Rates

The potential rise in inflation under Trump’s economic policies could delay or even prevent interest rate cuts by the Federal Reserve, which have been anticipated by markets.

The Federal Reserve typically raises interest rates when inflation picks up to cool off the economy. However, if inflation accelerates as a result of Trump’s tax cuts and tariffs, the Fed might hold off on rate cuts for much longer than expected. Currently, analysts are predicting that the Fed may not cut rates until 2025, as the inflationary effects from tariffs could take time to fully materialize.

Trump has been outspoken in his criticism of the Fed in the past, especially when it comes to higher interest rates. If inflation rises sharply under his administration, it could force the Fed into a difficult position, having to raise rates to keep inflation in check—something Trump has opposed.

Effect on Global Trading Partners

The economic ramifications of Trump’s policies would not be limited to the U.S. Several key trading partners, particularly those that rely heavily on U.S. imports, would likely face challenges.

1. Mexico and Canada: Given their reliance on exports to the U.S., both Mexico and Canada could see a sharp decline in trade if new tariffs are imposed. The resulting economic slowdown could affect their overall growth prospects and job markets.
2. China: Trump’s proposed 60% tariffs on Chinese goods would likely result in a substantial slowdown in China’s economic growth, potentially shaving off between 0.5 and 0.8 percentage points of growth over the next two years. This would only add to the challenges China is already facing, including a shrinking population and weak domestic consumption.
3. Germany: Germany could be particularly vulnerable to Trump’s economic policies. The U.S. is the largest market for German exports outside the European Union, and new tariffs could disrupt trade significantly. The Ifo Institute for Economic Research warns that German exports to the U.S. could fall by as much as 15%, which would hurt Germany’s economy and potentially destabilize the broader European market.

Conclusion

Trump’s re-election could bring significant changes to both the U.S. and global economies. While his policies—such as tax cuts and tariff hikes—may provide a short-term boost to certain industries, they also come with substantial risks. Higher tariffs could lead to rising costs for consumers, while labor shortages from immigration restrictions could push wages—and prices—higher. These inflationary pressures, combined with a stronger dollar, could delay interest rate cuts by the Federal Reserve and disrupt global trade.

The potential for higher inflation and slower economic growth would not only affect the U.S. but could also have far-reaching consequences for the global economy. Countries that depend on trade with the U.S. would face serious challenges, especially if tariffs spark a broader trade war. As a result, Trump’s economic policies could set the stage for a more inflationary environment both domestically and internationally in the coming years.