Trump's Return to White House Amid Economic Concerns

President-elect Donald Trump is set to begin his second term in the White House next week, but he faces a tougher economic situation than when he first took office in 2017. The most pressing challenge is the ongoing threat of inflation.

On Wednesday, the Bureau of Labor Statistics was expected to reveal consumer price data for December. Analysts surveyed by Dow Jones predicted that inflation would have picked up again in December. The core inflation rate, which excludes more volatile items like food and energy, was anticipated to have remained stable.

This information would provide further evidence that efforts to reduce inflation may be faltering. Just last Friday, the BLS announced the addition of 256,000 jobs in December, greatly exceeding expectations. This indicates that U.S. economic growth is not only stable but might be accelerating.

Trump's re-election was partly driven by a desire to sustain the economic momentum that some believe took shape during the Biden administration. This growth is evident in the gross domestic product (GDP) figures, which consistently surpassed forecasts, and in stock market performances that have reached historical highs.

However, this economic growth has come at a price, leading to several years of sharp inflation and increased borrowing costs for the U.S., along with raised interest rates for consumers. If these trends continue, they could jeopardize Trump’s economic policy goals, with many economists warning that they could lead to even greater price hikes.

Markets initially reacted positively to his election results; however, the response was not as jubilant as it was during his first term in 2016-2017. According to BCA Research, "The macro backdrop is not as forgiving for deportations, reflation, and tariffs as it was eight years ago, and the incoming administration could face a rougher ride than it did in its first go-round."

The concern over rising prices has led to a decline in both stock and bond market performance. The initial rise in stock prices following Trump's election has nearly vanished.

At the same time, U.S. borrowing costs have surged, impacted by high levels of debt issuance and indications from the Federal Reserve that it plans to maintain elevated interest rates in response to potential inflation risks.

Trump's threats regarding tariffs have contributed to these inflation worries, with analysts suggesting that many consumers may have already adjusted their purchasing behaviors in anticipation of these trade measures.

Seema Shah, chief strategist at Principal Asset Management, noted, "Recent economic strength has combined with a rising threat of tariffs to increase upside inflation risks." However, not all economic sectors are performing well. White-collar job sectors, as reflected in business and professional service surveys, have seen little job growth in the past 18 months, while payroll growth in manufacturing has also stagnated.

Despite the caution, not all economists are overly concerned about price increases linked to Trump's planned policies, nor do they foresee an unexpected rise in interest rates from the Fed. Goldman Sachs chief economist Jan Hatzius stated, "We do not expect fiscal or immigration policy changes to boost inflation appreciably, and we find it hard to envision tariffs that raise inflation enough to make a plausible case for hiking that do not also unsettle the equity market..."

Despite these reassurances, overall sentiment remains cautious as hopes for a slowdown in inflation rates, termed 'disinflation', appear uncertain. Analysts from Bank of America remarked, "Disinflation from here on out will be much more gradual."

Trump, Inflation, Economy