When Donald J. Trump became president in 2017, prices had risen about 5 percent over the previous four years. If he were to win the race for the White House in 2024, he would enter office at a time when they had risen by 20 percent and are still rising.
That’s a fundamentally different economic backdrop for the kind of policies — tariffs and tax cuts — that the Republican candidate is putting at the center of his campaign.
Trump has frequently blamed the Biden administration for the recent price hike, but inflation has been a global phenomenon since the start of the coronavirus pandemic in 2020. Supply chain issues, changing consumer spending patterns and other quirks related to the pandemic lockdowns and their aftermath have collided with stimulus-fueled demand, sending costs skyrocketing.
The resulting years of unusually rapid inflation have changed the country’s economic picture in important ways. Businesses are more accustomed to adjusting prices, and consumers are more accustomed to those changes, than they were before the pandemic, when costs were stable for decades. In addition, the Federal Reserve has raised interest rates to 5.3 percent in an attempt to slow demand and get a handle on the situation.
That combination — jittery inflation expectations and higher interest rates — could make many of the ideas Trump is talking about during his campaign riskier or more expensive than before, especially at a time when the economy is booming and unemployment is very low.
Mr. Trump is proposing tax cuts that could boost the economy and widen the deficit, potentially fueling inflation and adding to the national debt at a time when it costs the government a lot of money to borrow. He has talked about mass deportations at a time when economists warn that the loss of many potential workers could lead to labor shortages and higher prices. He is promising to raise tariffs across the board — and dramatically on China — in a move that could sharply raise the price of imports.
And he has suggested that interest rates would be much lower during his administration. That would be difficult for him to accomplish, since the Fed sets interest rates and is insulated from the White House. But if Mr. Trump were to try and find a way to successfully violate the Fed’s independence and drive down borrowing costs, that could reignite growth and price increases.
The policies Mr. Trump is putting in place are escalations of things he has tried before. Tax cuts that ballooned the nation’s debt, tariffs, immigration controls and verbal attacks on the Fed to lower interest rates were all cornerstones of his first term. But the trajectory of the economy since then makes it a potentially dangerous time to repeat those policies in a more drastic way.
“It’s one thing to have expansionary fiscal policy in a world with suboptimal inflation and below-full-employment unemployment,” said Mark Zandi, chief economist at Moody’s Analytics and a research and analysis officer for the Biden administration. But this is a “very different economic backdrop,” Mr. Zandi said.
While both Presidents Biden and Trump are expected to continue running deficits if elected, several economic analyses have suggested that Trump’s policy proposals so far would entail a substantially larger budget deficit. Researchers at the investment bank TD Cowen suggested that the choice between the candidates was between a “higher deficit” (Mr. Biden) and a “much higher deficit” (Mr. Trump).
There are built-in reasons why government spending is likely to continue rising under either candidate: Programs like Medicare and Social Security only get more expensive as populations age, interest costs are high, and even Biden has suggested he will extend the individual tax cuts for people making less than $400,000 — though he has also proposed tax increases on high-income households and corporations.
But the sizes vary widely. A Moody’s analysis suggests the budget deficit is likely to stabilize at just over 5 percent of annual output in coming years if Mr. Biden is re-elected with a divided Congress, rise to 6.4 percent if Mr. Trump wins alongside a Republican victory, and rise to a more muted 6 percent if Mr. Trump wins alongside a divided Congress.
If the budget deficit remains stable, Moody’s Mr. Zandi said, the economy is likely to remain on a relatively stable path, but a larger deficit could send the economy back up.
And annual deficits add to the country’s debt mountain. Periods of economic strength are typically seen as an opportunity to cut deficits to try to keep the national debt on a sustainable path.
“I think the minimum principle of our fiscal policy should be: First, do no harm,” said Jason Furman, a Harvard economist who was an economic adviser in the Obama administration. “Without one-time emergency spending, there’s simply no excuse for steps that would increase the deficit right now.”
That underscores an important point: this is not the economy that either candidate originally inherited.
Mr. Trump in 2017 took over an economy with a still-recovering labor market and low inflation. Mr. Biden in early 2021 presided over an economy in the midst of a pandemic. Whoever wins the 2024 election will face a very different backdrop. The economy is running at or near capacity, and the Fed is trying to slow it down with higher interest rates to get inflation under control.
Even as the labor market has cooled somewhat in recent months, the unemployment rate has been at or below 4 percent since late 2021, the longest stretch of such low unemployment since the 1960s. While that changed in data released Friday, which showed the unemployment rate rose slightly to 4.1 percent in June, that’s still low by historical standards.
Wage growth has cooled but remains robust. Consumer spending is slowing but has remained fairly strong by historical standards.
And inflation as defined by the Personal Consumption Expenditures index stood at 2.6 percent in the May reading. While that’s less than half the peak rate in 2022, it’s still higher than the Fed’s 2 percent target. Inflation is falling but remains faster than normal and could still be slightly elevated when the next president takes office, forecasters suggest.
Economists say that’s why Trump’s policies are so worrying.
“The economy is at greater risk of entering an inflationary spiral today than it was in 2018” when Trump launched a trade war, said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “That should make us more cautious about any policies that might let the inflationary genie out of the bottle.”
Mr Strain said he thought tariffs could push up prices, though he doubted they would trigger a series of increases, and that the deportations of immigrants could cause inflation by fuelling labour shortages in some sectors – though it would depend on how the policy played out.
Trump has promised to ramp up his use of tariffs by imposing import duties on nearly all trading partners, including a 60 percent tariff on all Chinese goods. Studies have concluded that his previous tariffs have raised costs for importers and consumers, with a recent analysis by the Peterson Institute for International Economics finding that the new tariffs would likely push up the price of imported goods, potentially costing the average middle-income household about $1,700 a year.
On taxes, Trump promises to permanently extend the personal tax credits, which expire next year, and he also talks about new credits for tipped workers.
That could fuel growth by putting more money than expected in consumers’ pockets. And in a world of higher interest rates, the effect on deficits could snowball. Trump’s initial tax cuts were financed with borrowed money, and analysts had suspected that any extensions or more cuts would follow.
The Congressional Budget Office already estimates that annual interest payments on the national debt could rise to $1.7 trillion by 2034, nearly doubling from current levels. The budget office has estimated that if the expiring individual income tax provisions of the 2017 tax law are extended, deficits would be $3.3 trillion larger between 2025 and 2034, and higher interest payments would rise to $467 billion.
If you look at Trump’s agenda as a whole, “you couldn’t have a more inflationary platform,” said Kimberly Clausing, a nonresident senior fellow at the Peterson Institute and a former Treasury Department official in the Biden administration.
One question is whether the potential for inflationary policies under Trump would prompt the Fed to raise rates — or at the very least prevent the central bank from cutting borrowing costs, as officials expect it to do later this year and then repeatedly through 2025.
If Mr. Trump is poised to win, “it won’t really affect interest rates in the short term,” said Thierry Wizman, an interest-rate strategist at Macquarie Group, a financial services firm. The Fed is likely to cut rates later this year, as expected.
But it would change “where they see the price going longer term,” he said, “and it will probably tilt them toward an end point that is higher than it would have been.”
Ana Swanson contributed to the reporting.