Bubble Burst

Though it might be under control, inflation swung the election. Now it could come back.

In the end, it was always inflation. Though inflation fell for six straight months before the U.S. election and at the end of September was at 2.4% — the lowest rate since March 2021 and near the Federal Reserve’s longstanding target of 2% — voters made high prices the top issue in re-electing Donald Trump to the presidency.

“Americans were comparing this economy to one without inflation, whether or not that was a realistic option according to economists,” New York Times reporter Ben Casselman said. “They weren’t saying, ‘Inflation is tough, but at least I have a job thanks to Biden.’ They were saying, ‘Of course I have a job, but now I have to deal with all this inflation thanks to Biden.’”

The phenomenon wasn’t unique to the U.S., and in hindsight the result was probably cemented years ago. The world over, incumbent parties both liberal and conservative have taken big losses because of dissatisfaction over rising prices. Nearly five years on from the onset of Covid, inflation remains a lasting legacy.

A Lot, But Too Late?

Supply chain disruptions spurred by factory closures in Asia throughout 2020-21 contributed heavily to inflation as supply was tough to come by while demand for goods was rising. With restrictions on where they could go, people were home more than ever and buying goods more than services. Those goods took a long time to arrive and cost a great deal. The CARES Act of 2020 and American Rescue Plan of 2021 provided more than $4 trillion in economic stimulus, putting money in people’s pockets and staving off the worst in terms of recession or depression, but they did contribute to inflation.

Inflation in the U.S. peaked at 9.1% in July 2022, and the annual rates were 7% for 2021 and 6.5% for 2022. Bills like the Infrastructure Investment and Jobs Act, CHIPS and Science Act, and Inflation Reduction Act helped slash that to 3.4% in 2023 and 2.4% thus far in 2024. Despite all that, prices on many consumer goods are 20% higher than they were when Joe Biden took office as president.

“When inflation comes back down, the prices of many critical items remain high, especially for people who are stretched and living paycheck to paycheck,” Robert Kahn, the managing director of global macro-geoeconomics at the New York-based Eurasia Group, told ABC News.

Inflation in the U.S. was lower than in other OECD countries, and the U.S. economy’s Covid recovery was the best in the world and wages have outpaced inflation. A widely predicted recession didn’t materialize, thanks in large part to that stimulus. The Federal Reserve deemed inflation enough in control that it cut rates by half a percentage point in September and by another quarter of a percent in November.

Americans, though, “are still feeling the effects of high prices,” Fed chair Jerome Powell said. “I think what needs to happen is happening, but it’ll be some time before people regain their confidence. We don’t tell people how to feel about the economy — we completely respect what they are feeling.”

Another Round Coming?

Those conditions help explain why Trump had an advantage by not being in power when inflation was the No. 1 issue. And though inflation appears to be defeated at this point, with the Fed poised to reduce interest rates for the foreseeable future, the new administration’s policies could bring it back.

Trump has pledged a 10% tariff on all imports, and up to 60% on imports from China, the top exporting country to the U.S. Trump has also threatened 25% tariffs on imports from Mexico. It’s possible that the plan forces more domestic production in the U.S., thus creating high-paying jobs. Even with the reshoring of manufacturing spurred by Covid and Biden-era bills, that won’t happen overnight.

“We’re buying stuff today for delivery next fall. So we’re just going to deal with it and we’ll just raise the prices. … It’s going to be very, very difficult to keep products affordable for Americans,” Timothy Boyle, CEO of Columbia Sportswear, told the Washington Post. Boyle told shareholders that “the argument about tariffs improving the domestic production of items such as footwear and apparels are fallacious …. the commodities that we engage in with footwear and apparel are among the most highly tariffed in United States. Some of the product carries as much as nearly 40% duties, and that has not translated into increased investment in domestic production.”

Companies are already preparing to raise their prices in anticipation of tariffs, as they told investors they would.

“If we get tariffs, we will pass those tariff costs back to the consumer,” Philip Daniele, CEO of AutoZone, said on a September earnings call.

Even more inflationary would be mass deportations of millions of undocumented immigrants and denaturalization of others. Trump has said, “There is no price tag,” when it comes to developing the infrastructure to round and deport millions of people.

In key industries like construction and agriculture that are already facing labor shortages, undocumented immigrants compromise a significant percentage of workers. They make up about 20-25% of the construction workforce and about 40% of crop farmworkers and meatpacking workers.

“Undocumented immigrants are a crucial part of the US economy,” Aaron Reichlin-Melnick, a senior fellow at the American Immigration Council, told Agence France-Presse. “If those people leave the workforce out of fear or because they’ve been deported it is going to cause a very significant labor shortage and cause inflation to rise and the cost of goods to rise as well.”

The council found that mass deportation would lower U.S. GDP by 4.2-6.8%.

It remains to be seen how much of that agenda the new Trump administration will pursue and can pass, but if those policies cause prices to go up, another incumbent party could face the public’s wrath.