Donald Trump’s rise to victory in the recent presidential race was fueled by widespread frustration over inflation and rising consumer prices. Now that Trump is set to take office again in January, many are questioning whether his economic policies will help bring inflation down or make matters worse.
In the final pre-election poll by Forbes/HarrisX, inflation was the top concern for 36% of respondents—more than any other issue. According to a Gallup poll, 54% of registered voters believed Trump was better equipped to handle the economy, compared to 45% who favored Joe Biden. Voters seemed to view Trump as a “change” candidate, hopeful he could tackle soaring prices, as noted by economist Bernard Yaros of Oxford Economics.
As Trump prepares for another term, it’s crucial to examine where inflation currently stands and what economic experts predict could happen under his leadership.
What Exactly is Inflation?
At its core, inflation refers to the increase in the prices of goods and services over time. Economists track inflation by observing price changes in a broad range of products and services. The Consumer Price Index (CPI) is a key tool used to measure these changes, reflecting what Americans typically buy.
The impact of inflation on consumers is measured by the “weight” of different goods and services, with some items having a larger influence on the overall inflation figure than others. This weighting reflects the share of total consumer spending spent on each category.
Understanding Inflation vs. Prices
Inflation measures the rate at which prices rise over time, usually year-over-year. This is different from the actual prices consumers pay for specific goods like food, gasoline, or insurance.
Since mid-2022, inflation has been gradually slowing. This is partly due to resolving COVID-19-related product shortages, a cooling of consumer demand following the pandemic’s spending spree, and a growing labor force that has slowed wage increases. The Federal Reserve’s interest rate hikes have also played a role in curbing inflation by raising borrowing costs, reducing consumer and business spending.
By September, the Federal Reserve’s preferred inflation measure was at 2.1%, a significant decline from 7% in March 2022, nearly meeting the Fed’s target of 2%. Meanwhile, core inflation, excluding food and energy, stood at 2.7%, down from a high of 5.6%.
However, despite this slowdown, prices for everyday necessities—such as food, rent, and gas—have increased at a much higher rate than overall inflation. For instance, grocery prices were up 1.1% from the previous year but had jumped nearly 22% since January 2021. Rent saw a 23.4% increase, and gasoline prices surged 27.7%.
For lower-income households, this means a larger share of their income is going toward basic necessities, leaving little room for discretionary spending. This persistent pressure on household budgets means that many voters still feel the effects of inflation, even as the overall rate of increase slows.
How Will Inflation Look in 2025?
Initially, economists predicted that inflation would continue to ease toward the Federal Reserve’s 2% target by the end of next year. However, experts are now forecasting that Trump’s trade and immigration policies could keep inflation elevated into 2025 and beyond.
Trump has proposed steep tariffs—up to 60% on Chinese imports and 10% to 20% on goods from other countries. These tariffs would be far more severe than those he implemented during his first term, which aimed to encourage manufacturers to move production to the U.S.
Goldman Sachs economists believe Trump will stop short of imposing such high tariffs. They predict a 20 percentage point increase in tariffs on Chinese imports and additional duties on cars.
If this scenario plays out, the Fed’s core inflation measure would fall to 2.4% by the end of 2025, still higher than the 2.1% Goldman estimates would occur without tariffs. Other analysts, like those at Bank of America and Nomura, predict inflation could remain between 2.5% and 3% through 2025, well above the 2% target.
These forecasts account for the possibility that U.S. manufacturers and retailers may absorb some of the tariff costs, rather than passing them directly onto consumers. Companies could also shift imports to countries with lower tariffs, and a stronger dollar could help offset some of the price hikes.
Will Immigration Affect Inflation?
Trump’s hardline stance on immigration—promising to deport millions of undocumented immigrants and reinstate policies that make asylum seekers wait in Mexico—could also have an impact on inflation. Goldman Sachs forecasts that net immigration could drop to about 750,000 annually, down from the recent 1.75 million and the pre-pandemic figure of 1 million.
Over the past few years, an influx of immigrants has helped alleviate labor shortages caused by the pandemic, slowing wage growth and reducing inflationary pressures. If immigration were restricted, it could make it harder for employers to find workers, which may lead to higher wages and increased prices, particularly in industries that rely heavily on immigrant labor.
For example, 68% of farmworkers are immigrants, and 44% of that group lacks permanent legal status. The reduction of immigration could have varying effects on inflation, with some economists predicting a modest impact, while others, like Barclays, suggest it could be more significant.
What About Oil Prices in 2025?
Trump’s push to increase oil production on federal lands could help lower gas prices. However, this would likely have little effect on the core inflation gauge, which excludes food and energy costs.
Oil and energy prices are volatile, affected by global market fluctuations. The Federal Reserve focuses on more stable price changes driven by consumer and business demand, which can be influenced by interest rates.
U.S. oil production is already at a record high, and oil prices are currently at a four-year low, around $69 per barrel. Therefore, while gas prices could remain stable or fall slightly, they are unlikely to significantly impact overall inflation.
Will Prices Ever Come Down?
While inflation has slowed, it’s unlikely that consumer prices will fall significantly in the long term. As the economy and population continue to grow, demand for goods and services usually keeps prices up. A broad decline in prices is called deflation, which signals a weak economy and can lead to a cycle of reduced consumer spending and further price drops.
Although some items like furniture, appliances, and used cars have seen price drops due to the easing of pandemic-related supply chain disruptions, they are still significantly higher than pre-pandemic levels. Similarly, oil and gasoline prices have fallen slightly due to reduced global demand, but other essentials like groceries and rent continue to rise, albeit at a slower pace. The strong demand for goods and services ensures that prices remain elevated for the time being.
