Latest Inflation Report Shows High Prices As Trump's Major Economic Challenge

Washington: As a candidate last year, Donald Trump suggested he could easily conquer inflation and ease voters' fears about the economy. “I will very quickly deflate,” he promised at a California rally. “We are going to take inflation, and we are going to deflate it. We are going to deflate inflation. We are going to defeat inflation. We're going to knock the hell out of inflation.” Consumer price index report on Wednesday showed that inflation is punching back — and President Trump could end up facing the same challenges that dragged down his predecessor, President Joe Biden. The annual inflation rate has risen in the three months since the November election to 3%, with gasoline prices climbing despite Trump's claims that his return to the White House would signal increased oil production that would lower energy costs. Trump frequently makes far-reaching assertions about his power to bring about change, only to find that it is no match for market forces. It's a humbling reminder that even US presidents are subject to the invisible hand of supply and demand rather than the masters of it.

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Consumer sentiment measures suggest the public already sees Trump's plans to expand tariffs as increasing inflation. On Wednesday, the president called for interest rate cuts, even though rate hikes by the Federal Reserve helped lower inflation that spiked at a four-decade high in 2022. The latest consumer price figures have unnerved economists and the financial markets because they suggest that strong consumer spending, solid job gains and a falling unemployment rate could reignite inflation. Steady demand, particularly from wealthier consumers, makes it easier for companies to keep raising prices. The cost of goods — including toys and auto parts — rose last month even before the imposition of tariffs. Trump has placed 10 per cent tariffs on China, in addition to announcing the removal of exemptions on his 2018 steel and aluminium tariffs. There are also potential tariff hikes on Canada and Mexico, including a potential executive order that would increase tariffs to match the import taxes charged by other countries.

Trump's Economic Policies Face Inflation Challenges Amid Market Uncertainty

All of this means that baseline inflationary pressures could be at their highest level in decades. “Disinflation may be dead, and we may be looking at a higher rate of inflation than we observed for the 20 years before the pandemic,” said Joseph Brusuelas, the chief economist at RSM, a tax and advisory firm. Trump's call for lower rates puts him in opposition to Fed Chairman Jerome Powell. 

“If inflation goes up in general, we will use our tools, which is the interest rate, to bring it back down to 2 per cent over time," Powell told a congressional committee on Wednesday. Powell also said that Trump's calls to lower rates wouldn't sway the Fed. So far, the Trump White House's main response to this challenge has been to blame Biden, an argument with a short lifespan as Trump is exerting more control over economic policy. “The Biden administration indeed left us with a mess to deal with,” White House press secretary Karoline Leavitt said at Wednesday's news briefing and added, “It's far worse than I think anybody anticipated.”

Inflation rises to 3% post-election

However, Trump allies are beginning to propose new strategies for tackling inflation. Standing in the Oval Office on Tuesday, billionaire Elon Musk, the head of the president's Department of Government Efficiency, proposed $1 trillion in spending cuts this year. Musk, the world's richest man who continues to control Tesla, X and SpaceX, among other companies, wants to eliminate $1 out of every $7 spent by the federal government to bring the inflation rate to zero. It's not clear based on lawsuits and Congress' responsibility for government funding, that Musk can deliver those savings. 

“If you cut the budget deficit by a trillion between now and next year, there is no inflation,” Musk said. “And if the government is not borrowing as much, it means that interest costs decline. So everyone's mortgage, their car payment, their credit card bills, anything, their student debt, the monthly payments drop. That's a fantastic scenario for the average American,” he added and said that such a steep cut might bring lower prices but also the pain of a sharp economic downturn. 

“That would be a roughly 4 per cent of GDP cut to federal spending, all in one year,” said Michael Linden, a senior policy fellow at the Washington Center for Equitable Growth and added, “It would be an instant recession.”

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For now, markets are anticipating more inflation as consumer demand stays strong, and Trump has yet to show how exactly his policies would keep prices low, as he promised to voters. The yield on the 10-year Treasury note jumped Wednesday to 4.62 per cent in response to the inflation report, a sign that investors expect interest rates, growth and inflation to be higher in the coming months. Consumers also say that inflation will rise. Americans' expectations of inflation over the next year have soared, according to the University of Michigan's consumer sentiment survey. 

The February survey said that inflation this year will be 4.3 per cent, up sharply from 3.3 per cent the previous month. Many respondents mentioned tariffs as a concern. When asked Wednesday why Trump's call for lower interest rates would temper inflation, Leavitt focused on what the president “wants” instead of what he would do. “He wants interest rates to be lower,” she said, adding, “He wants inflation to be lower. And he believes that the whole of government economic approach that this administration is taking will result in lower inflation.”