Inflation rates in the US have been on a rollercoaster ride since June 2022, when they reached their highest levels in 40 years. Over the past two years, ‘immaculate disinflation’ saw both Consumer Price Index and Personal Consumption Expenditures-based inflation rates decline sharply, despite robust economic growth and a healthy labor market. However, core inflation rates have recently stopped falling, moving sideways or even ticking up.
The Trump policy agenda is under scrutiny for its potential impact on inflation, with some economists questioning the Federal Reserve’s ability to maintain its independence. The American public experienced a decade of low inflation before the pandemic, which led to the massive spike in general price levels observed during the 2021-2022 inflation shock. The adverse effect on consumer psyche persisted into the disinflationary cycle and may have played a key role in determining the 2024 election outcome.
Recent inflation volatility and policy uncertainty have made forecasting inflation a tricky task. Economists still debate the underlying drivers of inflation dynamics, with monetarism being largely discredited due to its inability to predict short-term inflationary dynamics. Instead, proponents of the fiscal theory of the price level argue that inflation is primarily influenced by fiscal policies.
The Phillips curve-based view of inflation dynamics incorporates three key elements: inflation expectations, economic slack, and supply shocks. A central insight is that an overheating economy can generate upward price pressures, but the relationship between economic slack and inflation is unstable. Labor market conditions have loosened up in recent years, with a surge in labor supply and easing of wage pressures.
Looking ahead, there are concerns about the impact of stringent restrictions on cross-border labor flows and potential upward price pressures from Trump’s tariff proposals. The Biden administration’s loose fiscal policy likely contributed to the inflation problem, and it remains unclear whether the Trump administration will pursue a deficit-reduction agenda or stimulate economic growth with tax cuts.
Source: https://thehill.com/opinion/5119872-trump-era-inflation-debate