Trump Fanned the Price Fears That Haunt His Presidency Now

Political rhetoric on inflation has impacted people's expectations

- JONATHAN LEVIN

Inflation concerns may well have given Donald Trump the US presidency. His campaign harped on the elevated cost of eggs and bacon and argued that his predecessor Joe Biden, along with Fed chair Jerome Powell, had enabled an "inflation nightmare." Now, he faces public inflation expectations that are utterly divorced from reality and could well stand in the way of his success as president.

The University of Michigan's latest survey shows that consumers expect costs to rise 4.3% over the next year, the worst inflation expectations since 2023. They expect prices to rise 3.3% annually over the next five to 10 years, the highest level for the longer-term gauge since 2008. Mainstream economists are far more optimistic, but the perception of an ongoing inflation crisis could well be self-fulfilling.

There's broad agreement among economists that inflation expectations are an important determinant of realized inflation. The anticipation of higher costs can influence business's pricing decisions, induce consumers to buy now to front-run future price hikes and prompt workers to demand wage increases. Expectations feature in inflation forecast models and are consulted by monetary policy practitioners at central banks. In mid-2022, Powell even cited rising consumer inflation expectations as justification for delivering the biggest single policy-rate increase since 1994.