What effect would Trump’s policies have on inflation?
31 JUL, 2024
By Chris Iggo
Chris Iggo, CIO of AXA IM and Chair of the AXA IM Investment Institute analyses the Republican political programme and Trump's proposals. According to Iggo, most of Trump's proposals would tend to increase inflation. Polls place Trump as the frontrunner to take the White House in the next term, but how will his proposals affect the markets? What effect will they have on inflation? Will the election result affect the Fed's decision making?
The Republican policy programme makes for interesting reading. One of the promises is to ‘defeat inflation and make America affordable again’. This seems to focus mainly on energy and the thesis that getting the US to pump more oil and gas will prevent a repeat of the 2021-2022 energy crisis. There is no mention of withdrawal from the Paris Agreement, but there is a clear tilt towards the traditional fossil fuel energy industry, with a promise to undo the Green New Deal. It remains to be seen whether the subsidies for green energy and low-carbon activities included in the Inflation Reduction Act will be reversed, but Trump's proposals could be a major obstacle to further growth in the renewable energy sector. Indeed, ESG investment is set to become more difficult in the US in the coming years. The aggressiveness shown by several US states towards ESG could soon be amplified in Washington.
However, the populist view is that the US needs greater energy security through increased oil and gas production. The arguments about environmental issues, climate change and the global marginal price of energy are lost. Interestingly, the energy sector of the S&P 500 has outperformed in the last two weeks. Meanwhile, most other proposals would tend to increase inflation: import tariffs, immigration restrictions and a preference for lower taxes, and little sign of any attempt to reduce the federal deficit.
More broadly on inflation, the plan aims to restrict immigration - and deport illegal immigrants - and pursue more protectionist trade policies with higher tariffs on imports as part of this. These restrictions affect supply and are inflationary. It has been suggested that Trump also favours a weaker dollar to reduce the trade deficit. None of this is new, they were policies that ‘Trump 1.0’ pursued, but they should nevertheless be of concern if he is elected in November. Since 2020, the break-even inflation rate on 10-year inflation-protected US Treasuries has traded as low as 0.50% and as high as 3.0%. My bet is that the upper bound is more likely to be tested if these potential inflationary risks become more important under the next Administration.
Looking at the programme, we could conclude that a Trump presidency would be positive for the oil and gas sector, cryptocurrencies (ironic, as one of the arguments in favour of the widespread use of cryptocurrencies and digital assets is the fear of inflation and lack of trust in government institutions), AI, and sectors that will benefit from protectionism (automotive) and deregulation (pharmaceuticals). On the downside, fiscal largesse and a combination of market distorting inflationary policies could translate into higher government bond yields and corporate borrowing costs. In the short term, the Fed will keep a lid on interest rates and even lower them, but the steepening of the yield curve is an operation that works with both a looser Fed and Trump's fiscal policy.
