Voters are very upset about inflation – and about 60% of them blame President Trump for today’s high grocery prices and inflation in general (about 3.0% per the last CPI reading).
Most voters do not hold significant levels of assets (which rise with inflation), so high inflation rates are particularly painful for them, as inflation severely impacts their standard of living.
Peter St. Onge, in fact, insists that it was inflation that helped the Democrats do so well in recent elections.
The mortgage and real estate industries also dislike inflation, as it is one of the primary reasons that rates remain as high as they do.
But – is there anything a president can do about inflation?
Let’s look briefly at the causes of inflation.
I. Demand-Pull Inflation.
This is a price rise caused by excess demand. Fad toys are great examples, from Hot Wheels (1968; they were awesome) to Nerf balls, Simon, Rubik’s Cube, Transformers, Beanie Babies, Tickle Me Elmo, Pokémon cards, and a bunch of post-90s stuff I never heard of. We also saw demand-pull inflation in housing from 2004 to 2006, and when the economy first reopened after COVID when consumers were flush with stimulus.
The thing about Demand-Pull inflation is that it never lasts. Products invariably lose their appeal (although I loved my Hot Wheels for years) and manufacturers always overproduce (just ask a Beanie Baby collector).
So, there is not much a president can do here other than declaring a cool toy officially “uncool” (like my friend Jon Schleiffer did with my G.I. Joe), but I doubt that would work… I never liked Jon anyway.
II. Cost Push Inflation.
This is a price rise caused by rising input costs, including labor (when there is a shortage) and raw materials. The best example of this is the impact of rising oil prices in the 1970s.
The thing about Cost-Push inflation is that it never lasts. When producers of the high-priced inputs see the high prices, they always rush to produce and offer more of that input – as long as the government does not step in to “protect consumers.”
When the government protects us with regulations, we usually see higher prices, like we did with trucking, petroleum, and air fares in the 1970s, and like we see with utilities and insurance now.
So, the only thing a president can do here is stay out of the way, and hopefully push for additional deregulation.
III. Increase In The M2 Money Supply.
The money supply increasing faster than the supply of goods and services has always been the primary cause of inflation. The money supply is increased by bank lending and through the Fed’s purchase of bonds with newly printed money.
Banks will lend at too fast a pace if rates are held too low by the Fed, or if regulations make it too easy for banks to lend. The Fed buys bonds en masse via quantitative easing, like we saw during COVID, or when the Fed just buys bonds as part of their regular operations.
Economist Steve Hanke pushes this theory very aggressively, and he has the data and track record to back it up (he was by far the most accurate with inflation predictions over the last 4 years).
What Does Not Cause Inflation
I. Tariffs.
There is ample data to prove that high tariffs have never caused inflation. A. They don’t increase the money supply. B. The effects on prices are short-lived, as consumers find alternatives or buy less of the tariffed goods, and/or the manufacturers and retailers start to bear more of the costs. Both Hanke and Jim Rickards have opined on this repeatedly.
II. Deficit/Government Spending.
When the government spends money that it gets from either taxation or borrowing, it is just transferring money from the private sector to the government and back to the private sector. It is not creating new money. But, when the government spends money like crazy while quantitative easing (QE) is taking place (where the Fed prints money to buy Treasuries and mortgages), like we saw during the Biden administration, then you get inflation (and then some).
But note – Trump played that game too during the first year of COVID; it was just a bit less destructive because the economy was shut down, and banks were not lending – and there was a desperate need for liquidity.
We ran huge deficits during WWII and had no inflation, and we watched inflation plummet in the 1980s while running huge deficits. In addition, Japan has been the poster child for deficit spending now for 30 years – with very little inflation.
So, what can Trump do to stem inflation?
Very little, it turns out – other than encouraging the Fed not to cut rates too low, begging Congress to keep regulations at a minimum (to encourage more production), and begging the Fed not to engage in QE again (but it will).
Final Points & Trump’s Biggest Screw Up
- It’s interesting that voters blame Trump for inflation, when Biden’s average inflation rate was much higher (almost 5% vs. Mr. Trump’s 2% average over his terms) and when Biden likely caused much more of it.
- Mr. Trump’s biggest screw up was his promise to eliminate inflation on day 1 – when that is impossible (see above 😊). But it was that promise that is upsetting voters now, as voters apparently do not read my blogs.
- Voters don’t just want prices to stop going up, they want prices to drop. But if we actually see “deflation,” the economy will likely be in a lot of trouble… so voters should probably be happy with just steady prices.
- If Mr. Trump doles out $2,000 stimulus checks, which will be spent immediately, we will likely see more inflation. Sigh.
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