Was the dragon slain? Or just injured?
Inflation has been an economic problem for the past three years. This rose from a modest 1.4% when President Biden took office in 2021 to a modest 9% 18 months later. The Federal Reserve is aiming for a rapid increase in interest rates, and it looks like it’s going to happen. In September, inflation fell to 2.4%, almost in the normal zone.
Then, the blip goes up. The latest data showed inflation up to 2.6% in October. That could be a spot on an X-ray where there is nothing. Or it could signal a return to inflation, which would damage the outlook for interest rates, financial markets, and the policies of the incoming Trump administration.
The increase in inflation in October was not a fluke based on hurricanes or other one-time anomalies. The most important categories of goods and services increased, including food, energy, rent, and vehicles. This comes one month after the Fed basically declared victory against inflation. In September, the Fed reversed its monetary policy and began cutting interest rates, signaling that it was time to worry more about keeping growth humming than lowering prices.
The Fed remains on track for now. It cut short-term rates again on November 14 and may do so again at the next policy meeting in December. But the likelihood of further rate cuts is on the wane, with policymakers awaiting more lab results in the form of upcoming inflation data.
“Inflation may once again be front-page news,” Capital Economics said in a Nov. 13 analysis. Forecasting companies say that current inflation trends are OK, but the future outlook is more worrying – in large part because of Donald Trump’s plans when he takes office next January.
At least two elements of Trump’s agenda are inflationary: new tariffs on imports and the mass deportation of undocumented migrants. Tariffs are taxes that raise the cost of imported goods directly. Migrant deportations will reduce the size of the labor force, particularly targeting lower-wage workers. Replacing them with workers who can demand higher wages – or with expensive machinery – will raise costs one way or another, with producers passing on as much as possible to consumers.
A third inflation concern is Trump’s desire to cut more taxes, which could have a stimulative effect by putting more money in people’s pockets, boosting spending and demand and sometimes leading to higher prices.
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“Given everything that President Trump has promised so quickly – such as tariff increases, further tax cuts and reduced immigration – one can easily predict a re-acceleration of inflation next year,” Bernard Baumohl, chief global economist at the Economic Outlook Group, wrote on November 13. “The Federal Reserve is now in a real quandary.”
