Americans’ frustration with inflation was a key factor in Donald Trump’s victory in the presidential race earlier this month. But the question remains: Will his policies ease inflation, or could they worsen it?
In the final pre-election poll from Forbes/HarrisX, 36% of respondents said that inflation and rising prices were their top concerns, higher than any other issue. A separate Gallup poll found that 54% of registered voters believed Trump was better equipped to handle the economy, compared to 45% who favored Joe Biden.
In essence, many voters viewed Trump as a “change” candidate who could address the problem of high consumer prices, according to economist Bernard Yaros of Oxford Economics.
As Trump prepares to take office in January, let’s look at inflation and what economists predict for the future under his policies.
What Is Inflation in Simple Terms?
Inflation refers to the general increase in the price of goods and services over a certain period. Economists focus on price changes across a broad set of goods, such as the Consumer Price Index (CPI) compiled by the U.S. Department of Labor, which reflects what Americans typically purchase. Items in this basket are weighted according to their share of overall consumer spending, which determines the impact each item has on overall price changes.
The Difference Between Inflation and Prices
Inflation measures the rate of price changes, often over a year, while the actual prices consumers pay for goods—like groceries or gas—can fluctuate daily.
Inflation has been slowing since mid-2022 as supply chain issues caused by the pandemic have resolved, consumer demand has cooled, and wage growth has moderated due to a larger labor force. Furthermore, the Federal Reserve’s interest rate hikes have helped reduce inflation by making borrowing more expensive, encouraging consumers and businesses to cut back on spending.
In September, the Fed’s preferred inflation measure was 2.1%, down from 7% in March 2022, and almost at the 2% target. A “core” inflation reading, which excludes volatile items like food and energy, was 2.7%, down from a peak of 5.6%.
While the inflation rate has slowed, many consumers are still feeling the pinch because prices remain much higher than they were before the inflation surge started in early 2021. The cost of essential goods like food, rent, and gasoline has risen faster than the overall inflation rate, which continues to affect household budgets, as noted by economist Yaros.
For example, grocery prices in October were up just 1.1% from the previous year, but they were nearly 22% higher than in January 2021, compared to a 20% increase in the overall CPI. Rent rose 23.4%, and gasoline was up 27.7%.
Lower-income households have been forced to spend a larger share of their income on essentials, leaving less for discretionary purchases, Yaros explained. As a result, many voters don’t feel any better off, even though the rate of inflation has slowed.
What Will Inflation Look Like in 2025?
Inflation was expected to gradually approach the Fed’s 2% target by the end of next year, as household consumption and wage growth continue to cool. But economists now warn that Trump’s trade and immigration policies could keep inflation elevated through 2025 or even longer.
Trump has threatened to impose 60% tariffs on Chinese imports and 10% to 20% tariffs on goods from other countries, which is far more drastic than the tariffs he imposed during his first term, aimed at pushing manufacturers to bring production back to the U.S.
Some economists, including those at Goldman Sachs, believe Trump will scale back these aggressive tariffs. Goldman predicts a 20% increase in tariffs on Chinese goods and additional levies on auto imports.
Under this scenario, the Fed’s core inflation measure would fall from 2.7% in September to 2.4% by the end of 2025—higher than the 2.1% Goldman forecasts if no tariffs are imposed.
Other institutions, like Bank of America and Nomura, predict that inflation will remain between 2.5% and 3% through 2025, well above the Fed’s 2% target.
These forecasts account for several factors that could lessen the impact of tariffs on prices, such as U.S. retailers and manufacturers absorbing some of the costs through lower profits instead of passing them on to consumers. Additionally, companies might shift their imports to countries with lower tariffs, and a drop in imports could strengthen the dollar, lowering the cost of foreign goods.
Could Immigration Affect Inflation?
Trump has also pledged to reduce immigration by deporting millions of undocumented immigrants and reinstating policies that force asylum seekers to wait in Mexico while their cases are processed. Goldman Sachs estimates that net immigration could fall to 750,000 people annually, down from 1.75 million recently and 1 million before the pandemic.
The recent surge in immigration has helped ease labor shortages caused by the pandemic, reducing wage pressures and slowing inflation. Reducing immigration could make it harder for employers to find workers, pushing up wages and prices, particularly in industries with a high number of immigrant workers.
For instance, 68% of agricultural workers are immigrants, and 44% of that group lack legal status, according to Farmworker Justice, a nonprofit that advocates for migrant workers. If Trump’s policies were implemented, the impact on inflation could be significant, although the exact extent remains uncertain.
What About Oil Prices in 2025?
Trump has suggested opening more federal land for oil production as a way to reduce gasoline prices. While this could help lower gas prices, it wouldn’t affect core inflation measures, which exclude food and energy.
Energy and food prices are highly volatile, reacting to shifts in global commodities like oil and wheat. The Fed tends to focus on more stable price changes that reflect consumer and business demand, which can be influenced by interest rates.
U.S. oil production is already at a record high, and oil prices are currently at their lowest point in nearly four years, at $69 per barrel.
Will Prices Ever Fall?
Though inflation has slowed, average consumer prices rarely decline. Economic growth and a rising population drive demand, which tends to keep prices up. If prices were to fall broadly, it would be a sign of deflation, which signals a weakening economy. Deflation can create a vicious cycle, as consumers delay purchases in anticipation of falling prices, leading to even lower demand, weaker growth, and further price reductions.
As supply chain disruptions from the pandemic have eased, prices for some goods, like furniture, appliances, and used cars, have dropped. However, they remain higher than before the pandemic. Similarly, oil and gas prices have come down due to lower global demand and increased production.
The prices of other goods, such as groceries and rent, have continued to rise, albeit at a slower pace, driven in part by sustained consumer demand.
