Donald Trump’s victory in the recent presidential race was largely fueled by Americans’ concerns over inflation. But as the former president prepares to take office again, many are wondering: Will his policies ease inflation or could they make the situation worse?
In the final pre-election poll by Forbes/HarrisX, 36% of respondents identified inflation and rising prices as their biggest concern, a higher percentage than any other issue. A separate Gallup poll showed that 54% of registered voters believed Trump was more equipped to handle the economy, compared to 45% who favored Joe Biden. Voters viewed Trump as a “change” candidate, hoping he would address the high cost of living, according to economist Bernard Yaros of Oxford Economics.
Now that Trump is preparing to re-enter office in January, it’s important to look at the current state of inflation and what experts predict may happen under his leadership.
What is Inflation?
Inflation refers to the general increase in the prices of goods and services over a period of time. Economists measure inflation by tracking the price changes in a wide range of goods—typically using indices like the Consumer Price Index (CPI)—to reflect the typical purchasing habits of consumers. The relative importance of various goods and services is weighted according to how much people spend on them.
Inflation vs. Prices: What’s the Difference?
Inflation tracks the rate at which prices rise, usually measured over a year, while the actual prices that consumers pay for specific items, like groceries or fuel, can change much more frequently.
Since mid-2022, inflation has been gradually slowing. This is due to factors like the resolution of COVID-19-related product shortages, a slowdown in consumer spending after the pandemic boom, and a larger labor force putting a cap on wage increases. Additionally, the Federal Reserve’s interest rate hikes have cooled inflation by increasing borrowing costs, leading businesses and consumers to reduce spending.
As of September, the Federal Reserve’s preferred inflation gauge was at 2.1%, a significant drop from 7% in March 2022, almost reaching the central bank’s 2% target. Meanwhile, core inflation, which excludes volatile food and energy prices, stood at 2.7%, down from a peak of 5.6%.
Even though inflation has slowed, the prices of everyday necessities like food, rent, and gasoline have increased at a faster rate than the overall inflation index, which has continued to strain household budgets. For instance, grocery prices in October were up 1.1% from the previous year, but they were nearly 22% higher than in January 2021. Rent prices rose 23.4%, and gasoline jumped by 27.7%.
Because of these higher costs, lower-income households have been forced to allocate a larger portion of their budgets to essential items, leaving them with less money for other purchases. This persistent strain means many voters still feel financially worse off, even though inflation rates have moderated.
What Will Inflation Look Like in 2025?
Inflation was expected to continue its downward trend toward the Fed’s 2% target by the end of next year. But experts are now warning that Trump’s trade and immigration policies could keep inflation higher for a longer period, possibly until 2025 or beyond.
Trump has threatened to impose steep tariffs—up to 60% on Chinese goods and 10% to 20% on imports from other countries. These tariffs would be far more significant than the ones he imposed during his first term, which aimed to bring more manufacturing back to the U.S.
Goldman Sachs economists predict that Trump will likely stop short of implementing these extreme tariffs. Instead, they forecast that he will increase tariffs on Chinese imports by 20 percentage points and impose additional levies on automobiles.
If this happens, the Federal Reserve’s core inflation measure would fall from 2.7% in September to 2.4% by the end of 2025, but that would still be higher than the 2.1% Goldman expects without tariffs. Other analysts, like those at Bank of America and Nomura, predict inflation will remain between 2.5% and 3% through 2025, well above the 2% target.
These predictions consider factors that could offset some of the tariff impacts, such as U.S. manufacturers and retailers absorbing costs by reducing profit margins rather than raising prices. Companies may also shift imports to countries with lower tariffs, and a reduction in imports could strengthen the dollar, which would help lower the cost of foreign goods.
Will Immigration Affect Inflation?
Trump has also promised to take a hardline stance on immigration, pledging to deport millions of undocumented immigrants and reinstate policies that force asylum seekers to wait in Mexico. Goldman Sachs estimates that net immigration could fall to 750,000 people annually, down from the 1.75 million recorded recently and 1 million before the pandemic.
A recent surge in immigration has helped alleviate labor shortages caused by the pandemic, slowing wage growth and reducing inflationary pressure. If Trump’s policies were enacted, however, fewer workers could make it harder for employers to find staff, especially in industries with large immigrant workforces, potentially driving up wages and prices.
For instance, about 68% of agricultural workers are immigrants, and 44% of that group lacks permanent legal status, according to Farmworker Justice, a nonprofit that advocates for farmworkers’ rights. The impact of reducing immigration on inflation would likely be modest, according to Goldman Sachs, but Barclays believes the effect could be significant, although it hasn’t offered specific estimates.
What About Oil Prices in 2025?
One of Trump’s key proposals to reduce prices is to open more federal land to oil production, which could help lower gasoline prices. However, this would have little impact on the core inflation index, which excludes food and energy.
Oil and energy prices tend to be volatile, subject to global commodity price swings. The Federal Reserve focuses on more stable price changes that reflect overall demand, which is more directly impacted by interest rates.
U.S. oil production is already at an all-time high, and oil prices are currently low—$69 per barrel, the lowest they’ve been in almost four years. This suggests that while gasoline prices may remain steady or drop, they are unlikely to have a significant effect on the overall inflation rate.
Will Prices Ever Drop?
While inflation has slowed, it’s unlikely that average consumer prices will decline overall. As the economy and population continue to grow, demand for goods and services usually keeps prices up. A broad decrease in prices would signal deflation, a sign of a weak economy that can create a vicious cycle: consumers delay purchases in anticipation of falling prices, which depresses demand and further lowers prices.
Although prices for some goods, like furniture, appliances, and used cars, have dropped as pandemic-related supply chain issues have eased, they are still higher than before the pandemic. Likewise, oil and gas prices have dropped due to reduced global demand and higher production levels. Other prices, such as for food and rent, continue to rise, albeit at a slower pace, as consumer demand remains strong.
