Trump fanned inflation's flames, now they may burn him
By Jonathan Levin / Bloomberg Opinion
Inflation concerns may very well have delivered the presidency to Donald Trump. During the campaign, he routinely harped on the elevated cost of eggs and bacon and argued that his predecessor Joe Biden — together with Federal Reserve Chair Jerome Powell — had enabled an “inflation nightmare.”
Now, Trump faces public inflation expectations that are utterly divorced from reality and could well stand in the way of his success as president.
The latest University of Michigan survey showed that consumers expect costs to rise 4.3 percent over the next year, the worst inflation expectations since 2023. More disconcertingly, they expect prices to rise 3.3 percent 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.
That’s because there’s broad agreement among economists that inflation expectations are an important determinant of the path of realized inflation. The anticipation of higher costs can influence business’ pricing decisions; induce consumers to buy now to front-run future price hikes; and prompt workers to demand wage increases. Expectations feature prominently in inflation forecast models, and are consulted by monetary policy practitioners at the world’s most powerful central banks. In mid-2022, Powell even cited rising consumer inflation expectations as justification for delivering the biggest single policy-rate increase since 1994.
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