Trumping Inflation?

O nce again, Donald Trump is the president-elect of the United States. His remarkable political comeback was fueled by voters’ concerns about the economy, particularly inflation. So what will a second Trump administration do for the cost of living?

A group of prominent, Nobel Prize–winning economists asserted that inflation will be worse under Trump. What concerned them most were Trump’s promises to enact steep tariffs and his desire to bring the Federal Reserve under political control. While these policies certainly have their downsides, they’re unlikely to result in sustained price hikes of the kind we saw in 2021 and 2022.

Inflation happens whenever the money supply grows faster than households’ and firms’ demand to hold cash rather than spend it. The 9 percent consumer-price inflation in summer 2022 was mainly driven by monetary policy. Newly created money chased the same amount of goods, thereby raising prices. During and after the pandemic, the Fed had greatly expanded the money supply to purchase newly issued government debt, which funded Covid-19 relief payments. Much of this “stimulus” occurred after the economic turmoil ended. The American Rescue Plan Act, a $1.9 trillion boondoggle signed by President Biden in 2021, is a case in point. While government spending will likely continue to grow, it won’t ratchet up as fast as under the Biden-Harris administration. And even if it did, without monetary accommodation, deficits alone create minimal price pressures. 

Tariffs surely raise the price of consumer goods. Taxing steel imports, for example, makes steel more expensive. It also drives up the prices of goods made from steel. However, this isn’t what economists mean by inflation. They mean sustained dollar depreciation: Most goods and services get more expensive, not just a select few. Trump’s tariffs would cause a rapid one-time jump in specific prices that would persist as long as the tariffs did. But they shouldn’t, by themselves, cause perpetually rising prices across most goods and services.

Trump’s interest in subordinating the Fed to his agenda is more troubling. If politicians on short-term election cycles made monetary policy, they’d want to lower interest rates and print money just before facing reelection. That would boost the economy on Election Day but create an economic hangover afterward — when the politicians are safely ensconced in office after a fresh win.

Even this concern, however, may be overstated. Inflation in 2021 and 2022 came as a surprise to nearly everybody, including top Fed officials. Remember when the best and brightest insisted in the mainstream media that the inflation would be “transitory”? For politicians to use the Fed for self-serving ends, they would have to be better predictors of the timing and lags of monetary policy than the experts. But if the specialists can’t do this reliably, it’s a stretch to suppose elected officials could. The question then becomes, what costs would they bear? This reveals what ultimately matters: accountability. Whoever is responsible for monetary policy should bear the consequences for getting it wrong.

While subjecting the Fed to political control would be undesirable, given the temptation to deliver quick and easy money, floating it as a hypothetical helps highlight the absence of accountability under the current system. Nobody at the Fed has been held accountable for the worst inflation in 40 years — and it’s highly unlikely anybody ever will be. In my hypothetical, if politicians had more control over monetary policy, voters could at least send them packing whenever dollar depreciation became excessive. This plays into another major theme of Trump’s campaign: Too many government decisions are made by unelected, faceless bureaucrats who don’t answer to anyone. If this seems extreme, remember that even Milton Friedman thought the benefits of central-bank “independence” were exaggerated.

If Trump and a Republican Congress (we don’t yet know who will be controlling the House) want to reduce inflation, here are two big things they should pursue. First, they need to rein in government spending. Large budget deficits don’t cause inflation directly, but they might cause it indirectly by pressuring the Fed to stop interest rates on Treasury securities from rising. The only way to do that is to run the printing press to buy up the new bonds — just like during Covid-19. Keeping government-spending growth below GDP growth is a good way to prevent fiscal follies from causing money mischief.

Second, Republicans should pass and Trump should sign a bill to reform the Fed. Monetary policy-makers shouldn’t pick their own goals, but they currently do. We need a strict monetary rule, decided by legislators and enforced by the executive. Elected politicians (who are, by definition, answerable to the people) should be able to fire central bankers who allow inflation to get out of hand. 

For this to work, the concept of “out of hand” would have to be carefully defined. That means establishing a clear inflation target. For example, Congress could force the Fed to adopt a 2 percent goal, which differs from the Fed’s unnecessarily broad “flexible average inflation target.” There could even be a stable-dollar (0 percent) goal; it’s a myth that we need some inflation for the economy to function smoothly. Ultimately, the chosen rule is a matter of economic wisdom and political prudence. But that shouldn’t distract from the importance of having a rule, even an imperfect one.

The commentariat exaggerates the risks of a Trump-induced inflation. There are reasons to suspect that his economic agenda will make specific goods and services more expensive. But inflation is another matter. In fact, there’s a chance that the president-elect and his allies in Congress can reform the Fed to lessen inflationary pressures. We’ll simply have to wait and see.