Inflation is falling, but the next president could bring it back

Inflation is just about dead – unless the next president brings it back to life.

Both Vice President Kamala Harris and former president Donald Trump are pushing economic ideas that – whatever their merits – could raise prices on many goods and services, some economists said.

Harris has proposed an expanded child tax credit and wants to give some first-time home buyers $25,000 toward their down payment.

Both moves would add gas to an economy that is already growing faster than its long-run potential.

Trump says he will eliminate taxes on Social Security payments, remove millions of workers from the labor force with the largest deportation of unauthorized migrants in history and impose new tariffs on everything that the United States imports.

Those moves would boost costs throughout the economy.

Investors view Trump as the greater inflation risk, according to analysts at Macquarie Group, a global investment firm based in Sydney, Australia.

His policies could add a full percentage point to the annual inflation rate, said Thierry Wizman, Macquarie’s global foreign exchange and rates strategist.

“There’s still this sense out there, among traders, that Trump is more inflationary,” he said.

The former president’s tax, tariff and immigration policies would likely trigger a faster pace of price increases and higher interest rates to combat them, which would raise the value of the U.S. dollar, Macquarie told clients this week.

Recent financial market moves show investors reevaluating the Democrats’ prospects in November.

As Harris rose in public opinion polls this month, traders who had expected Trump to defeat President Biden began unwinding their bets.

That led to a nearly 3% drop in the dollar’s value, Macquarie said.

Karoline Leavitt, a spokeswoman for Trump’s campaign, blamed inflation on the Biden administration’s “reckless spending” and said “Trump’s agenda would deliver needed financial relief.”

The candidates’ dueling proposals come as the Federal Reserve is expected to cut interest rates next month for the first time since March 2020, amid progress in the fight against inflation.

The risk, some say, is that presidential actions next year could trigger renewed price increases just as they finally appear to be easing.

In July, consumer prices rose at an annual rate of 2.9%, still above the Fed’s 2% target but down from a mid–2022 peak above 9%.

“We should be very cognizant about policies that could risk further exacerbating that inflationary pressure. And there are certainly a number of policies that have been put forward, both by Vice President Harris and by president Trump, that could risk reigniting inflation,” said Marc Goldwein, senior policy director of the nonprofit Committee for a Responsible Federal Budget.

“We should be on the lookout.”

Both campaigns deny their plans will raise prices. Harris has proposed increasing the corporate tax rate to 28% from the current 21%, as well as increasing taxes on the well-off, which her campaign says will provide enough revenue to cover her plan’s cost.

And she has proposed measures to ease prices by expanding supply, including tax incentives for construction of “starter homes.”

Trump insists – contrary to standard economic views – that his tariffs will be paid by foreign countries. Numerous studies, in fact, have concluded that U.S. tariffs are paid by Americans.

The Republican platform that he largely authored vows to “end inflation” by expanding domestic energy, cutting government regulations and reining in federal spending.

Harris said Trump’s tariff plans would lift prices “even higher” while Trump said inflation “will only get worse if she is elected.”

Harris, who has been a candidate for just one month, has released only a partial economic road map.

Her call for middle-class tax relief and support for first-time home buyers would cost $1.7 trillion over a decade, according to CRFB.

Her other proposals to raise the minimum wage and to eliminate taxes on tips would cost an additional $100 billion to $200 billion.

About $1 trillion of that 10-year expense would be offset by her planned increase in the corporate tax rate, leaving a deficit of about $800 billion to $900 billion.

The Harris campaign says she will close the gap with additional tax increases, including on high-earners, which the Biden administration proposed this year.

But Harris also has said she will propose new initiatives on child care and long-term care, which could affect the bottom line, according to Goldwein.

He said it would be “premature” to reach a conclusion on the Harris plan’s inflation effects before those details are available.

Inflation has been voters’ top complaint for much of the past three years.

To control it, the Fed starting in March 2022 raised interest rates 11 times in the fastest such campaign in decades.

Higher rates slowed the economy by making borrowed money more expensive for consumers and businesses.

At the same time, supply chains that had been overwhelmed during the pandemic began operating more normally.

The combination of lower demand and improved supplies brought inflation down.

But higher rates left a mark on the economy. The cost of a 30-year mortgage reached 8% in late 2023, almost twice the average rate when the Fed began hiking.

Monthly housing starts now are one-third lower than when the rate increases began.

And new commercial and industrial lending over the past 18 months has flatlined.

Now, amid signs of softening in the labor market, investors expect the Fed to cut rates at its Sept. 18 meeting.

The unemployment rate in July was 4.3%t, up from 3.5% one year earlier.

The only disagreement among money managers is the size of the first cut.

About 72% of investors expect the Fed to cut by a quarter of a percentage point, according to CME Fed Watch, which tracks futures market contracts.

Roughly 28% anticipate a half-point move.

The Fed’s expected turn to rate-cutting will mark a new chapter for the economy, with implications for average Americans and businesses.

Lower rates could offer relief to potential home buyers who have been sidelined by high mortgage rates or to businesses that have delayed investment plans.

“You have companies that are waiting to potentially do things, but they need to see lower rates before they end up doing them,” said Neil Dutta, head of economics for Renaissance Macro Research.

But any burst of activity probably will not happen immediately.

Markets already have priced in the Fed’s initial move.

The average cost of a fixed-rate 30-year mortgage is 6.5%, down about half a percentage point since the beginning of July.

If the central bank does lower rates next month, it is likely to continue doing so, Dutta said.

Economists at Goldman Sachs said on Tuesday they expect the Fed to cut by a quarter point at each of its next three meetings, lowering its benchmark interest rate to a range of 4.5% to 4.75% by year end.

Some economists, meanwhile, worry that the economy’s inflation ills are not quite cured.

Consumer spending remains solid. Layoffs are below pre–pandemic levels.

And second–quarter gross domestic product grew at annual rate of 2.8 percent, which is faster than the 1.8% mark that the Congressional Budget Office says is sustainable.

“I do not think inflation is truly dead,” said economist Michael Strain of the American Enterprise Institute.

“There’s a very real chance that inflation could get stuck above 2.5%.”