WSJ Your Money Briefing - Can Trump Fix Inflation?

Episode Date: December 13, 2024

President-elect Donald Trump vowed to tame inflation throughout his 2024 campaign. But following through on those promises could be a challenge. WSJ economics reporter Justin Lahart joins host J.R. Whalen to discuss how much power a president has when it comes to inflation and why some experts worry Trump’s plan could have the opposite effect on prices.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Exchanges. The Goldman Sachs podcast featuring exchanges on rates, inflation, and U.S. recession risk. Exchanges on the market impact of AI. For the sharpest analysis on forces driving the markets and the economy, count on exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. Here's your Money Briefing for Friday, December 13th. I'm JR Whelan for The Wall Street Journal. Inflation has trended downward for the past year, but prices are still high.

Easing the pain for consumers was one of the themes of Donald Trump's 2024 presidential campaign. His biggest answer was he was going to drill baby drill. By opening up drilling, by making permitting processes and so forth easier, that energy costs would go down and that would bring down overall inflation. Is that likely to work? We'll talk to Wall Street Journal economics Group, the world's leading derivatives marketplace, offering the widest range of global benchmark products across all major asset classes. CME

Group, where risk meets opportunity. President Trump has promised to tackle inflation once he takes office, but how much power does he actually have? Wall Street Journal economics reporter Justin Laihart joins me. Justin, bring us up to speed. Why did inflation race up so high in 2021 and 2022? And why are prices still stubbornly high high even though overall the rate has come down? There are a few things that went on that pushed inflation up.

For sure, the pandemic and supply chain problems that it caused were huge problems. Economists also think that to some degree, the stimulus packages that went out to help boost the economy after the pandemic may have contributed to inflation. There's also a view that the Federal Reserve could have started raising rates earlier than it did. That might have tamped down inflation as well. Right now, we're at a point where inflation has cooled a lot, where it might be on a glide path back to the 2% that the Federal Reserve is targeting.

As for why prices are stubbornly high, the thing about inflation is once prices go up, it's very hard for overall prices to go down. A big part of that is people's wages adjust. inflation goes up, and then people's wages go up. And that's a cost for businesses. There's not a good situation where prices would go down. Nobody wants to accept lower wages, that would be a deflationary environment. And deflation is just one of the worst things that can happen to an economy. It drives up credit, it drives up financial markets, sort of a Great Depression situation

in the worst case. What specifically did former President Donald Trump say during the most recent campaign that he would do regarding inflation? His biggest answer was he was going to drill baby drill. That by opening up drilling drilling by making permitting processes and so forth easier that energy costs would go down and that would bring down overall inflation. Why have we heard so much skepticism from critics about that?

When it comes to drilling, making it easier for oil and gas companies to drill, that doesn't mean they're going to up production. So US production is already quite high. So it's not clear that would raise production a lot. But in any case, oil prices are coming down. Gasoline is floating around three bucks now, getting to under three. So that's already happened.

It may have nothing to do with expectations of more drilling, but it is disinflationary. Trump has also talked about tariffs during the campaign. We've seen some retailers advise shoppers to buy now before potential tariffs go into effect. Is it automatic that tariffs would cause prices to go up? Economists generally think that tariffs will raise prices. There are some offsets. If you raise tariffs, the dollar might strengthen.

So that would have, you know, sort of the opposite effect on import costs. Tariffs would also face retaliation. US exporters would have a harder time exporting those goods. There could be an excess supply here, so prices for those could go down. Also, consumers having to spend more money on tariffed goods might spend less on other items.

That could bring the prices of those other items lower. But all in all, those are offsets, but not complete offsets. The general idea is that tariffs will raise prices. Do presidents by rule of law have any power to bring down prices? Yeah it's really tricky. Presidents have in the past tried to attack inflation. The results have really been mixed. When it comes down to it, what economists would say would really help cool inflation are things that take a long time to take hold. You could have less regulation that takes time to make its way into the economy. You could improve the skills of the U.S. workforce. That takes even longer, right? That's educating workers.

You could set up things that create incentives to make firms more efficient, to improve productivity, to develop technologies. Again, these are really long-term solutions, not things that you can really get done in the space of just four years. How much do consumers willing to pay certain prices work into the math here about inflation? People really hate paying higher prices. That doesn't mean that they won't. If people have the means to spend, they will spend. They may cut back on less essential items, but if prices for essential items go up, then

consumers will pay. One concern right now is that when consumers expect higher inflation, that can be a self-fulfilling prophecy. If you expect higher inflation, you're gonna fight for a wage increase to get in front of it. That wage increase itself is inflationary, so it can snowball. If inflation picks up again, this is a movie that Americans have now seen before. We've had an inflation experience. We hadn't had one in a very long time. People will try to get out in front of it and they will try harder to get out in front of it than they did maybe in 2021. So there is this sort of concern that if we have another bout of inflation,

that it will work its way into expectations and that would be harder for the Federal Reserve to contain. That's WSJ's Justin Lehart and that's it for your money briefing. Tomorrow we'll have our weekly markets wrap up, what's news and markets, and then we'll be back on Monday. This episode was produced by Ariana Asparu I'm your host JR Whalen Jessica Fenton and Michael LaValle wrote our theme music our supervising producer is Melanie Roy Aisha al-muslim is our development producer Scott Salaway and Chris Zinsley are deputy editors and Falana Patterson is the Wall Street Journal's head of news audio. Thanks for listening. Amazon Q Business is the new generative AI assistant from AWS because many tasks can make business

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