Donald Trump surged ahead of main rival Kamala Harris and reclaimed the White House, with inflation playing a pivotal role in his victory. A surge in federal spending weakened the dollar’s purchasing power, leading to price hikes that left Americans reeling and influenced their decisions on Election Day. Signs are now emerging that inflation is making a comeback, putting pressure on the new administration to fulfill promises of reining in the cost of living.
Prices Surpass Expectations
The latest Consumer Price Index (CPI) figures exceeded forecasts, with a 3.0 percent increase over the past 12 months until January, up from 2.9 percent in the previous year, as reported by the Bureau of Labor Statistics. Writing for The New York Times, Jeanna Smialek highlighted that inflation persisted even after factoring out volatile food and fuel costs, underscoring the challenges of controlling price hikes.
The Producer Price Index (PPI), a gauge of future consumer prices, also saw larger-than-expected jumps, with a 3.5 percent rise in the 12 months leading to January 2025. The Wall Street Journal noted another U.S. inflation reading surpassing projections, with wholesale prices climbing 0.4% in January and an upward revision for December.
Amidst these developments, the specter of rising inflation looms larger, reminiscent of the 9.1 percent inflation rate recorded in June 2022 during the previous surge when the dollar’s value plummeted. While the current numbers are not as dire, the prospect of wages lagging behind escalating prices poses a looming challenge for the Biden administration and contributed to Kamala Harris losing to Donald Trump.
“Inflation was a top concern for voters leading up to the election,” remarked economist David A. Steinberg from Johns Hopkins University post-election. “Many believed Trump would be more effective in curbing price hikes than Harris.”
Tackling inflation in the face of eroding monetary value presents a formidable task, as underscored by Trump’s acknowledgment of the difficulty in lowering prices once they’ve risen. The new administration is keen on averting discontent over rising prices, given the pivotal role inflation played in Trump’s appeal. Initial efforts to enhance government efficiency and reduce expenses through the Department of Government Efficiency (DOGE) signal a step in the right direction, crucial in avoiding the pitfalls of the 2021–2023 period.
Root Cause: Government Spending
Economist John Cochrane from the Hoover Institution and the Cato Institute highlighted the correlation between inflation and excess aggregate demand in a March 2024 piece for the International Monetary Fund (IMF). He pointed to the massive government stimulus of approximately $5 trillion, $3 trillion of which was freshly printed money with no plans for reimbursement, as a key driver of inflation.
As Trump navigates the complexities of addressing inflation, tough decisions lie
The massive federal spending spree began during his tenure, coinciding with the outbreak of COVID-19 while he served his first term in the White House. President Joe Biden continued this trend with his own spending initiatives. Now back in office, Trump must confront the aftermath of government fiscal irresponsibility, for which he shares some responsibility. The recent cuts to the Department of Government Expenditures (DOGE) signal a positive shift. A more conservative federal approach to spending could help mitigate the risk of exacerbating inflation. However, attempts to reduce government costs have been mostly superficial, with proposals such as eliminating the Department of Education, which accounts for a small fraction of federal spending.
Veronique de Rugy pointed out in a recent Reason article that the primary issues lie in entitlement spending and interest payments on the national debt. Programs like Social Security, Medicare, and Medicaid currently account for a significant portion of federal spending and are major contributors to future budget deficits. Around half of federal expenditures go toward entitlement programs, with defense spending and income security each representing 13%, and debt interest at 11%. Without addressing these major expenses, the government will struggle to significantly reduce its size or spending.
President Trump’s reliance on tariffs as a tool for economic protectionism has further complicated matters. By imposing high tariffs on imports to boost domestic manufacturing, he inadvertently raised prices for consumers and hindered output and employment. The Tax Foundation’s Erica York warned that the tariffs imposed by both Trump and Biden have had negative effects on the economy.
Recent predictions from the Federal Reserve Bank of Boston suggest that additional tariffs could drive up core inflation rates. Economist John Cochrane has highlighted the potential risks of supply shocks resulting from trade barriers, which could exacerbate inflation. Cochrane also criticized the Federal Reserve for not being proactive enough in adjusting interest rates to counter inflation caused by excessive government spending.
To combat the looming threat of inflation, Trump should focus on cutting government expenditures, particularly targeting major spending areas. Additionally, he should reconsider his trade war tactics and embrace deregulation, energy production, and technological advancements to counter the inflationary pressures of protectionist policies. By taking these steps, Trump can work towards fulfilling his pledge to maintain price stability and economic growth.
