Trump win, GOP sweep would fuel inflation: Moody’s Analytics
Inflation could reaccelerate if former President Trump wins the White House and Republicans win control of Congress, according to a recent report by Moody’s Analytics.
Under the so-called Republican Sweep scenario, which the forecasters place at a 35 percent probability, consumer price inflation accelerates from 3 percent in 2024 to 3.6 percent in 2025, according to the three economists who authored the report.
Trump policies — including higher tariffs, tax cuts that stimulate the economy and an exodus of foreign immigrants that could tighten the labor market and increase labor costs — would fuel the uptick in inflation.
“The Federal Reserve, which is focused on labor costs and inflation, may feel compelled to resume its rate hikes, or at the very least wait longer to cut rates. Recession becomes a serious threat once again,” the economists wrote.
Inflation is a key for voters ahead of the election, according to polling. President Biden has dealt with low approval ratings on his handling of the economy, due largely to the roughly 19-percent increase in prices since he took office in 2021.
Inflation spiked around the world thanks largely to pandemic-related supply chain snarls, a rapid economic resurgence and the war in Ukraine. U.S. inflation has also fallen sharply from a peak of 9.1 percent in June 2022 to just above 3 percent. Even so, Biden is struggling to win voters over on the economy
The Fed has hiked interest rates to a 23-year high to try to bring down pandemic-induced inflation. It’s expected to start cutting interest rates later this year provided inflation continues to come down.
Inflation clocked in at an annual rate of 3.3 percent in May, and prices did not rise last month, according to the Labor Department’s latest consumer price index (CPI) print.
In contrast, a Biden victory this November would have no impact on the economists’ baseline inflation forecast of 2.4 percent in 2025, according to the report.
If Biden wins the White House but there’s a divided Congress, which Moody’s set at a 40 percent probability, the economists projected inflation to continue to fall and return to the Fed’s 2 percent target by summer 2025.
Moody’s Investor Service, which is separate from Moody’s Analytics, downgraded its U.S. ratings outlook from stable to negative last November, citing risk of high interest rates and rising debt to the country’s fiscal strength.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US fiscal deficits will remain very large, significantly weakening debt affordability,” the agency said in October.
Moody’s also warned of the danger of political polarization on Capitol Hill, which could impact lawmakers’ ability to “reach consensus on a fiscal plan to slow the decline in debt affordability.”