Is the dragon slain? Or simply wounded?
Inflation has been the scourge of the economy for the last three years. It spiked from a benign 1.4% when President Biden took office in 2021 to a searing 9% some 18 months later. The Federal Reserve took aim with speedy rate of interest hikes, and it appeared to work. By September, inflation was right down to 2.4%, almost in the traditional zone.
Then, an upward blip. The most recent data shows inflation ticked back as much as 2.6% in October. That may very well be a spot on the X-ray that seems to be nothing. Or it could signal that inflation is making a comeback, which might scramble the outlook for rates of interest, financial markets, and the policies of the incoming Trump administration.
The inflation uptick in October wasn’t a fluke based on hurricanes or other one-time anomalies. Most significant goods and services categories rose, including food, energy, rent, and vehicles. This got here one month after the Fed principally declared victory over inflation. In September, the Fed reversed monetary policy and commenced cutting rates of interest, signaling that the time had come to fret more about keeping growth humming than about getting prices down.
The Fed is staying the course for now. It cut short-term rates again on Nov. 14 and should accomplish that again at its next policy meeting in December. But the chances of more rate cuts are dropping, with policymakers waiting for more lab ends in the shape of forthcoming inflation data.
“Inflation might soon be front-page news again,” Capital Economics announced in a Nov. 13 evaluation. The forecasting firm argues that the currently inflationary trend is OK, but the longer term outlook is more worrisome — largely due to what Donald Trump plans to do once he takes office next January.
No less than two elements of Trump’s agenda are inflationary: latest tariffs on imports and the mass deportation of undocumented migrants. Tariffs are taxes that raise the price of imported goods directly. Deporting migrants would cut back the scale of the labor force, especially targeting lower-wage employees. Replacing them with employees who might demand higher pay — or with costly machines — would raise costs a technique or one other, with producers passing as much as they might on to consumers.
A 3rd inflation concern is Trump’s desire to chop taxes further, which might have a stimulus effect by putting extra money in people’s pockets, boosting spending and demand and sometimes resulting in higher prices.
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“Given all that President-elect Trump has promised to do quickly — resembling hike tariffs, cut taxes further and slash immigration — one can easily foresee a re-acceleration of inflation next 12 months,” Bernard Baumohl, chief global economist at Economic Outlook Group, wrote on Nov. 13. “The Federal Reserve is now in an actual quandary.”