ANALYSIS || Many economists have expressed concern that elements of Trump’s agenda may be inflationary
When President Barack Obama took the oath of office in January 2009, unemployment was rising, markets were falling and families were losing their homes. Obama inherited an economic calamity.
Donald Trump has a much stronger hand, even as he returns to the White House and promises to drastically reshape the American economy through a flurry of executive actions and sweeping legislation.
Unemployment ended 2024 with a rate of just 4.1%. The only presidents to have inherited a lower unemployment rate were George W. Bush in January 2001 and Richard Nixon in January 1969.
While the cost of living remains a major frustration and the risks of reigniting inflation remain, the US economy is generally in good shape when Trump takes office. The job market is enjoying a historic period of uninterrupted growth, wage increases are outpacing price rises and global growth continues to defy expectations.
“The president is inheriting a very healthy economy,” says David Kelly, chief global strategist at JPMorgan Asset Management.
Big questions arise
One thing that could cool down the US economy a bit is the enormous amount of uncertainty that is being injected right now.
It’s natural for there to be some uncertainty when there’s a change of power in Washington, with the new party bringing its own ideas and philosophies.
However, Trump is starting his second term with a bang, enacting a series of executive actions on his first day that cover everything from energy and immigration to how the federal government works.
Trump has promised this is just the beginning, promising to impose massive tariffs, cut a staggering amount of bureaucracy and grant new tax benefits to businesses and individuals.
“Uncertainty is a tax on the economy,” recalls Kelly, from JPMorgan. “In football, you might want to keep your opponent in the dark. But if we’re running an economy, we want to make our plans clear. If we don’t do this, people may wait to make decisions and this tends to slow down the economy.”
Doubts continue to hang over Trump’s trade agenda.
Trump has promised to impose massive tariffs on allies and rivals, but the exact timing and impact of those tariffs remain unclear. For example, he said on Monday that he would impose 25% tariffs on Canada and Mexico on February 1, but he did not sign an executive action ordering those tariffs to take effect.
Regarding other countries, Trump stated that his administration could impose widespread tariffs, but that it was not yet prepared to do so. What will be the level of tariffs and how long will they remain high? How will other countries react? Some, like Canada, have vowed to retaliate with tariffs and other actions.
During his inauguration speech, Trump promised to “immediately begin the overhaul of our trading system to protect American workers and families” and even reiterated plans to create a Foreign Revenue Service to collect tariff revenues. (Although Trump has said that foreign countries will be taxed, the tariffs are paid by U.S. importers, not foreign exporters. And they often pass the costs onto consumers in the form of higher prices.)
The cost of living challenge
Trump knows that many Americans’ biggest frustration is the price level. People are spending much more on groceries, rent, car insurance and other items than they did before the pandemic.
The typical U.S. household is spending about $1,213 more than in January 2021 for the same goods and services, according to Moody’s Analytics.
Salaries, on average, increased a little more than that. Still, this means that many people are just barely getting by with the higher cost of living and many others are being left behind.
Trump has said he will get prices to fall, but many economists doubt that will happen in general unless the economy collapses. While consumers love price drops, outright deflation can be dangerous and difficult to escape.
“It is not possible to return prices to pre-pandemic levels. The only way to do that is not through a recession, but through a depression,” Kelly said. Trump acknowledged this recently, noting that once prices rise, it’s difficult to make them fall again, but insisted he can make it happen.
However, many economists have expressed concern that elements of Trump’s agenda may be inflationary.
Companies could pass the cost of customs duties onto consumers, as they have done in the past. And mass deportations could deprive key sectors of construction, agriculture and others of workers.
There are currently concerns that the US economy is too hot – and that Trump’s agenda could overheat it. The inflation rate has fallen, but remains above the Federal Reserve’s target. Markets hit record after record, fueled by a run on shares of big technology and artificial intelligence companies.
“The bottom line is that the US economy is entering 2025 on solid footing,” wrote Torsten Slok, chief economist at Apollo Global Management, in a note released Monday titled ‘The US economy is in great shape’ .
“We continue to be more concerned about the risks of rising growth and inflation,” Slok said.
Ultimately, Trump’s economic success may not depend on falling prices. Instead, Trump should be rooting for the continuation of a streak that began under President Joe Biden: real wage growth.
Wages have consistently outpaced prices. If this trend continues during Trump’s term, many more Americans will follow the higher level of prices and feel better about the cost of living.
