A Donald Trump redux come November may come with an inflation reboot too.
There are of course multiple reasons cited as to why Biden is struggling to get ahead of former President Donald Trump in opinion polls. Issues from immigration to social policies to the president's age are high among them - and, most recently, many Biden supporters' dismay at his stance on the Gaza conflict.
But if you still believe "it's the economy, stupid", then the biggest puzzle of the past year has been how a booming U.S. economy, full employment and a roaring stock market have not benefitted the incumbent more in the eyes of the electorate.
The simplest answer many offer is the positives were sapped by high inflation and interest rates that hurt the pockets of many Americans.
All of which might suggest U.S. voters would be minded to back a candidate promising to keep consumer prices in check.
And yet economists parsing Trump's plans to resume his 2018-2020 trade wars via universal import tariffs, with possibly 60% levies on goods from China, reckon there'd be little relief on that score from his return to the White House.
Tariff rises of that breadth and scale risk another generalised price squeeze, they say, and may in turn prevent borrowing costs from retreating as much as many now hope.
While early soundings from the hustings can shift, Trump floated the idea of a 10% universal import tariff in an interview last August and doubled down last month by claiming he would impost tariffs of 60% or higher on Chinese goods.
That could act like another supply shock, Rabobank said this week, and it could complicate the Federal Reserve's mission to get the "genie back in the bottle."
"While there are many uncertainties about the impact of a second Trump presidency on economic policy, a rise in import tariffs is highly likely," wrote Rabobank's U.S. strategist Philip Marey. "This will affect the trajectory of inflation and consequently the Fed's rate path."
Investors have for months tried to home in on the election to see how the contest might affect world markets. Many focus on differing fiscal policies of tax and spend, tending to postpone judgement given the uncertain constellation of Congress needed to implement either party's plans.
But significant trade policy powers rest in the hands of the president, and Trump's proposed Reciprocal Trade Act would give him broad discretion to ramp up retaliatory tariffs on countries when they are determined to have put up barriers of their own.
There's some debate over whether Trump's previous tariff campaign actually had a significant price effect before the pandemic, as many had feared, and much debate about the extent to which tariff evasion via re-routed supply chains softened it.
But Fed researchers at the time estimated that if all Chinese imports became subject to a 25% tariff, that could lead to a 0.4 percentage point increase in consumer prices and a 14 point hit to business investment prices.
Even though Chinese goods as share of overall U.S. imports have fallen significantly since, and the Biden administration's ongoing post-pandemic standoff with Beijing saw none of Trump's 2018 tariffs rolled back, a 60% tariff going forward could be seismic.
INFLATION SPURS
Marey at Rabobank said the original Trump tariffs were very visible in the protected sectors of the producer price index but they were only levied on about one-tenth of all imports and tended to be muted in overall consumer price rises as a result.
A universal tariff hike would be a different matter and immediately feed into both U.S. CPI and PPI, he reckoned.
"Although we have learned not to take every threat made by Trump literally, his preference for tariffs was very clear during his first term in office," the Rabobank strategist said. "Therefore, we take his threat of a universal tariff seriously. In fact, we expect it to be one of his main campaign promises."
What's more, significant disinflation of the past year owes most to easing supply constraints on energy and goods trade, and it's only domestic service prices and rental gauges that have stayed stubbornly high. If the latter remained sticky through this year and were then met with resurgent goods inflation due to tariff hikes, then the Fed's job gets mighty tricky.
The Fed can't and won't consider the election outcome explicitly right now. But if it limited rate cuts to a modest 50-75 basis points in 2024, the prospect of a tariff shock ahead may mean markets have to consider pegging back the 175 bps of easing currently priced for a full easing cycle out to 2027.
Even fund managers with a positive view on disinflation and a relatively benign economic take on a second Trump presidency think a 60% tariff hit on Chinese imports could be both "devastating" to Chinese imports and bad for U.S. inflation.
Stephen Jen at Eurizon SLJ thinks pressure on third countries that are now increasingly intermediating trade flows between the U.S. and China would be immense and ultimately spur traded goods price inflation. "This would be bad for U.S. inflation and the purchasing power of American consumers," he said.
And the growth impact of such a trade war could be large too - most obviously on China. Capital Economics this week estimated a 60% tariff increase and stricter enforcement of them could lop as much as 0.7% from China's GDP.
Rabobank's Marey said likely overseas retaliation against a universal tariff, along with tit-for-tat escalations thereafter, could eventually hit U.S. production and employment too.
No one doubts this will be a high stakes election on myriad fronts. Yet any prospect of inflation relief from a switch of power may prove well wide of the mark.
The opinions expressed here are those of the author, a columnist for Reuters.
