This subject has come-up here from time-to-time and I have tried my darnedest to remain circumspect, intellectually honest, good-humored and resist any snarky impulses to poke fun of individuals who seemingly believe that presidents posses cryptic powers to turn inflation on, and off, like a switch. When it comes to lazy economic thinking the struggle is real. Thankfully, understanding inflation is not rocket science. If you have a basic grasp of the interplay between excess liquidity (M2) and demand economics it is not very complicated. But I digress.
Inflation figured significantly in both the run-up and results of last month's presidential election. In his interview with Kristen Welker several weeks ago president-elect Trump said: I won on two things; I won on the border and I won on groceries. And at the RNC convention of last summer Trump declared he would: End the devastating inflation crisis immediately. Trump took credit for low inflation in his first term of office; he might take the blame for price inflation in his second term. Time will tell.
As an old guy I am mildly bemused at the notion that younger voters have no institutional memory of inflation, soaring energy costs and the accompanying astronomical interest rates, of the late 1970s and early 1980s. By those hardcore economic standards today's historically low inflation, low energy costs and interest rates are the modern equivalent of lotus eating. Nevertheless, the president-elect has promised to bring inflation down and if he doesn't the voters might become restive. He's
certainly got his work cut out for him as there's not much a chief
executive can do to immediately influence forces at play in an economy
as large and complex as ours.
Complicating this already challenging task is the potential interplay of tariffs and immigration policies. Consider this.
Tariffs are a tax. If I own an import-export business and import an item subject to a tariff or duty I have to pay the US Treasury the tax due upon receipt. The country of origin does not pay the tax - the importer does. To cover the tax I'll mark-up the price of the imported item when it lands with a distributor. As a consumer purchases the item from a retailer it is that buyer who ultimately pays the mark-up. Consequently, tariffs can contribute to inflation as the price of retail goods rise. Trump's challenge is the use of tariffs as a negotiating tactic or to surgically target specific imported goods. It's a high wire balancing act.
Almost two million undocumented workers are integrated into our food supply chain. Another 30% of construction workers are immigrant labor - documented or not. Immigrant labor is a significant contributor to what we pay for everything from fruits and vegetables at the grocery to a replacement roof.
My hope is that the Trump administration finesses this stuff. Get too aggressive on immigration and tariffs and prices could rise. Fail at one or the other and you tread at your own peril with an economy-stalling bout of deflation. If only there was a magic switch in the White House bunker.
Trump naturally supports the sweeping reform of government regulation. Furthermore, efforts to re-shore manufacturing to our hemisphere implies efficiencies, retraining a labor force and other productivity gains. This shrinks inflation pressures but takes time to trickle down in a network economy. Because 70% of our economy is driven by consumer spending these gains would be modest at best.
Last, but not least, there is: drill, baby, drill. Trump has promised to increase domestic energy production by lifting environmental restrictions and fast-tracking permitting. It isn't clear to me precisely how this will dramatically reduce inflation and shrink the price of my groceries; nor has the former president elaborated.
Transportation costs already benefit from lower energy pricing because domestic energy production has been at record levels for years. Several weeks ago I filled-up the Honda with regular unleaded and paid less than $2.50 a gallon. Prices fell further over the busy Christmas Holiday travel season. Go figure.
I own shares of energy and related companies and in a world where CEOs answer to shareholders; further retail price reductions will be challenged by sustaining record profitability, dividends and share prices. Besides, oil is a fungible commodity, traded in dollars. Accordingly, global markets play an outsized role in pricing. My sense is that lower energy costs are largely baked-into the cake so we'll have to see how this plays-out. What I know for sure is government doesn't drill for oil and gas. (Like I said, the struggle is real.)
In closing, inflation is relatively easy to explain; it is far more difficult to bend to your political will. It is possible that the in-coming president is beginning to wrestle with boastful promises made during his campaign. As I said to a pal several months ago: I'm looking forward to detailed policy which will improve my prosperity and general lot in life.
Meanwhile, all of our major appliances have been replaced, a new water heater installed, a new car for me, new car for Jill and a contract for a replacement metal roof on the house in 2025. If tariffs materialize I think we may have dodged the major impact of any Trump tax increases. Only time will tell....
Edit To Add:
Got home around noon following an overnight road trip and topped-off the tank of the Missus' new Honda. Local pricing for regular unleaded: $2.479....
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