Donald Trump’s surprise upset of Hillary Clinton had markets around the world reeling and then surging on Wednesday. Thursday looked to be more of the same as stocks continued to climb, with the Dow Jones setting a record high. And while investors are happy as they embrace Trump’s policies, should consumers be celebrating or worried as those same policies may bring rampant inflation?
Inflation Set To Return Under President Trump
Inflation has been absent from the economy in recent years. Now, with a new president coming into office, everything may be about to cost a little more in the U.S. Trump’s announced plan for his first 100 days in office has many analysts believing inflation is coming in alongside the new policy changes. How exactly does a president’s policies influence inflation?
President-Elect Trump has promised tax cuts, infrastructure spending, and better jobs and wages at home. He’s promised to renegotiate trade agreements, crack down on immigration, and remove illegals from this country. And while traders can capitalize on Trump’s policies in the markets, consumers should understand that all of this may seem great on the surface, but makes for a combination sure to bring about inflation.
What is inflation, exactly?
Put simply, inflation is a sustained increase in the price of goods. Things cost more year to year. There’s no surprise there. Cars in 2015 cost an average of $33k. That figure is up 2.6 percent from 2014, which is an expected marginal increase. But the average cost of a car 30 years ago was just 9 thousand dollars. That’s how inflation works. Goods go up year over year, with inflation compounding annually with little increases eventually adding up to huge differences. But there’s another side to it. While costs go up, wages tend to stay the same, meaning every dollar buys less and less. So when Donald Trump promises to increase wages for workers, shouldn’t inflation go down as consumers have more money?
Higher wages mean a business has to pay more to employees. And that money has to come from somewhere. Since a business’s purpose is to generate revenue and profits, companies are not looking to take smaller profits in order to pay employees more. So to keep profits high, businesses must then charge more for their goods and services. Pair that with Trump’s promises to deport illegals. Companies utilizing cheap labor to pass the savings onto consumers now must raise rates and costs everywhere in order to accommodate for their new hiring and employee costs.
Now let’s look at Trump’s promise to renegotiate trade agreements. One of his focuses outlined in his first 100 days speech is renegotiating the way America trades with the rest of the world. Some of these deals are major agreements such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership. If Trump is able to make changes to these agreements, they’ll most likely be very isolating/protectionist changes, raising the cost of imported goods by adding yuge taxes to international goods imported into the U.S. This is likely to increase inflation as prices will go up due to a reduced supply of these goods, since countries will choose to ship less goods to the U.S. to save money.
With the Fed expected to raise interest rates in December, prices may surge even more quickly. The increased cost of goods will hopefully lead to increased wages for workers, but could also make running a business for foreign companies employing American workers since they’ll have to factor in higher taxes.
Watch this interview with the former Rep. Ron Paul talks about inflation with President Trump's administration.
Lower taxes paired with infrastructure spending and more jobs may boost the economy under Trump, but expect cost of living to be on the rise as well.
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