What could Donald Trump’s potential second term in White House mean for inflation?

As former President Donald Trump gears up for another potential term in the White House, economic analysts are issuing warnings about the possible rekindling of global inflation.

Trump’s hallmark America-first policies, characterized by high tariffs and low taxes, may lead to heightened inflation both in the United States and internationally.

Trump’s economic nationalism could be bad news

Trump’s first presidential term was marked by aggressive economic nationalism, which could be intensified if he secures a second term.

According to Michael Metcalfe, head of macro strategy at State Street Global Markets, the economic environment now is starkly different from when Trump first took office in 2016.

“Back then, inflation had been low for an extended period, and inflation expectations were subdued,” Metcalfe explains.

“Now, in 2024 and 2025, we are contending with higher levels of inflation and elevated inflation expectations, all within an ongoing inflation mindset.”

This scenario suggests that Trump’s policies could further stoke inflationary pressures, impacting not only domestic markets but also causing ripples across global economies.

Tariffs, taxes, and global trade

The cornerstone of Trump’s economic strategy involves imposing high tariffs on imported goods and cutting domestic taxes. These tariffs tend to be inflationary as they increase the cost of imports, allowing domestic producers to hike their prices, which in turn burdens consumers.

Simultaneously, tax reductions can boost consumer spending, which may drive prices up further due to increased demand for goods and services.

Both Trump and current President Joe Biden have hinted at intensifying tariffs on China amid escalating geopolitical tensions.

However, a poll of economists suggests that inflation is likely to spike more significantly under Trump due to his staunch protectionist stance, compared to Biden, whose inflationary pressures might stem from large spending packages.

International impacts and market responses

The potential for higher inflation under a second Trump term could extend beyond the United States. In Asia, according to Gareth Nicholson of Nomura, a Trump presidency could be a “negative risk factor” for the region’s stocks.

Macro-wise, it will likely be inflationary for the global economy, possibly even leading to stagflation, and could accelerate shifts in supply chains within Asia.

In Europe, Goldman Sachs forecasts that a Trump presidency could add a modest 0.1 percentage point to inflation due to increased tariffs affecting global trade dynamics.

Similarly, Marc Franklin of Manulife views Trump’s potential policies as a “somewhat reflationary mix” due to his propensity for further tax cuts and revisiting Chinese tariffs.

This could lead to “a bias towards curve steepening,” an indicator of rising inflation expectations and consequently, higher interest rates.

Political stability and market reactions

Trump’s campaign has recently gained momentum, particularly following his appearance at the Republican National Convention in Milwaukee.

This resurgence comes shortly after an assassination attempt at a rally in Pennsylvania, an event that Trump remarkably survived, displaying resilience and defiance.

Following this, U.S. stock markets reacted positively to the strengthened prospects for the pro-business Republican nominee.

However, analysts caution that this market enthusiasm might be short-lived due to concerns over Trump’s protectionist and geopolitical agendas, which could unsettle global economic stability.

The potential economic implications of a second term for Donald Trump are significant, with the possibility of heightened inflationary pressures both domestically and internationally.

As the global economy continues to navigate uncertainties, the prospect of a Trump presidency underscores the need for markets and policymakers to prepare for shifts in trade, taxation, and inflation dynamics.

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