Mark Zandi: What you should know about inflation and Trump’s economic plans

By many standards, Americans are experiencing a strong economy.

The typical American feels pretty good about their job, according to a job satisfaction survey recently released by the Conference Board. Unemployment has been hovering near a remarkably low 4% for more than two years.

And if you are among the two-thirds of Americans who are homeowners, you must be happy with the steady rise in your home’s value. You are even happier if you are among the one-half of Americans with a sizable stock portfolio. Stock prices have been rocketing to record highs.

What’s likely bothering you about your finances is that you’re paying a lot more for almost everything. Prices aren’t rising so fast now — inflation has moderated — but they are up a lot from just a few years ago. This is especially true for things we can’t do without such as groceries, rent, and gasoline.

The economic policies of President Joe Biden’s administration have been criticized for being the root cause of the higher prices. Critics say the American Rescue Plan, the nearly $2 trillion deficit-financed pandemic relief plan passed early in Biden’s term, pumped up demand for goods and services, causing inflation to take off.

Yes, the ARP caused inflation to increase, but at the time, this was thought to be more a feature than a bug. Inflation had been too low in the decade between the financial crisis and pandemic, and Federal Reserve officials had been working hard to get inflation back up consistent with their 2% target. And at long last, they got what they wanted.

But inflation painfully continued to increase because of pandemic disruptions to global supply chains, the job market, and the Russian war in Ukraine and the chaos it created in oil, natural gas, and agricultural markets. Fortunately, as the economic fallout from the pandemic and Russian war has now largely faded, so too has the high inflation.

While inflation has receded and is finally near the Fed’s target, the next president must be careful not to reignite it. But if former President Donald Trump’s economic policies are implemented as he has articulated them in his speeches, press releases, and on his website, they would likely do just that.

Particularly disquieting is his plan to jack up tariffs on all imported goods. The tariff on Chinese products would be 60%, and 10% on imports from other countries. For context, the current effective tariff is closer to 3%.

If the tariffs that Trump imposed in his first term are a guide, most of the tariff increase will be passed through in higher prices to American consumers. Of course, those tariffs were on close to $400 billion in imports, the bulk from China. This go around, he is talking about tariffs on more than $3 trillion in imports from across the globe.

If you are thinking that the higher tariffs will shelter American companies from foreign competition and create a lot more jobs here, think again. For sure, there are times when tariffs make strategic sense, such as when other countries aren’t playing by the rules, giving their companies undue advantages.

But across-the-board tariffs are sure to result in retaliation by other countries, likely including higher tariffs on U.S. exports to those countries. It is hard to see all this resulting in more U.S. jobs. That was certainly the lesson from the tariff wars in Trump’s first term.

Trump’s proposal to deport unauthorized immigrants would also add to inflation. Estimates vary, but most put the number of unauthorized immigrants living in the United States at well over 10 million.

It’s not realistic to think that all these people would be forced to leave the country, but even a fraction would be highly disruptive to industries that rely on these workers. Those industries include agriculture, manufacturing, transportation and distribution, leisure and hospitality, retailing, and child and eldercare. Costs and prices would go up.

Then there are the tax cuts. Trump wants to make permanent the tax cuts for individuals that passed in his first term and to lower the corporate tax rate further. While the revenues raised by the higher tariffs would pay for some of the tax cuts, most of the cuts would seemingly be financed by bigger budget deficits. This would juice up demand, which in a full-employment economy like ours would add to inflation.

Of course, the Federal Reserve would not countenance the higher inflation. At the very least, the Fed would be reluctant to lower interest rates, as is currently widely anticipated, and might even increase them. The economy would suffer, and recession would become a serious threat. These concerns are widely held. Consider the recent open letter from 16 Nobel prize winners in economics voicing similar ones.

If inflation is on your list of financial worries, you may want to heed those who write the economic textbooks.

Mark Zandi is chief economist of Moody’s Analytics.