5 economic forces that could shape the first year of Trump's presidency

WASHINGTON — Like most presidents, Donald Trump faces an economy that seldom bends to political ambitions.

The Republican has promised strong growth, high tariffs, income tax cuts and booming oilfields. But despite the solid job market and low 4.1% unemployment rate, he has to contend with headwinds like inflation, a budget deficit, increased tensions over trade, the fallout from his plans to curtail immigration and a persistent wealth gap.

Each of these issues could help to shape how voters feel about a president they returned to the White House with the specific goal of fixing the economy.

For his part, Trump wants to blame all the challenges before him on his predecessor, Joe Biden, who in turn blamed Trump in 2021 for the problems his own administration had to tackle.

“This begins with confronting the economic chaos caused by the failed policies of the last administration,” Trump told the World Economic Forum on Thursday.

Here are five economic forces that could shape the first year of Trump’s presidency:

Whipping inflation is easier said than done.

In AP VoteCast, an extensive survey of last year’s electorate, 4 in 10 voters called inflation the “single most important factor” in their choice for president. About two-thirds of this group voted for Trump — a sign he owes his victory in large part to the high cost of groceries, gasoline, housing, autos and other goods.

Going forward, monthly reports on the consumer price index will be a clear measure of whether Trump can deliver. But inflation has actually increased in recent months. Consumer prices were increasing at a healthy 2.4% annual rate in September, compared with 2.9% in December. Economists say inflation could worsen if Trump imposes tariffs and uses deficit-funded income tax cuts.

Republicans often hit Biden hard on egg prices. But Democrats could use similar attacks on Trump. Over the past year, coffee costs have risen just 1% for U.S. consumers, but the International Monetary Fund has the price of the actual beans climbing 55% in a sign that lattes, espressos and plain old cups of joe could soon cost more.

Then there’s housing. Voters are still frustrated by high mortgage rates and prices staying elevated due to a shortage of properties. Shelter is 37% of the consumer price index. Price increases for housing have eased, but shelter costs are still rising at 4.6% a year, compared with annual increases averaging 3.3% before the pandemic.

Trump is betting that more energy production can cut into inflation rates, but domestic production is already near record levels, according to the government.

Trump says 25% tariffs are coming for Mexican and Canadian imports as soon as Feb. 1. He’s also talked about additional tariffs of 10% on Chinese goods. His stated goal is to stop illegal border crossings and the flow of chemicals used to make drugs such as fentanyl.

For Trump, tariffs are a diplomatic tool for his policy goals. But they’re also a threat possibly meant to jumpstart trade talks. They’re also a revenue raiser that he claims could bring trillions of dollars into the treasury.

Trump did increase tariffs during his first term, with revenue collection more than doubling to an annual rate of $85.4 billion, which might sound like a lot but was equal to just 0.4% of the gross domestic product. Multiple analyses by the Budget Lab at Yale and the Peterson Institute for International Economics, among others, say the threatened tariffs would increase costs for a typical family in a way that effectively raises taxes.

What really matters is whether Trump delivers on his threats. That is why Ben Harris, a former Biden adviser who is now director of economic studies at the Brookings Institution, says voters should focus on average tariff rates.

“Trade is really tricky” Harris said. “But in broad terms, look at what he does and not what he says.”

Trump likes to blame inflation on the national debt, saying Biden’s policies flooded the U.S. economy with more money than it could absorb. But about 22% of the $36 trillion outstanding total debt originated from the policies of Trump’s first term, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.

Paul Winfree, a former Trump staffer who is now president and CEO of the Economic Policy Innovation Center, warned in a recent analysis that the U.S. is getting too close for comfort to its fiscal limits. His analysis suggests that if Trump can preserve 3% growth he could extend his expiring 2017 tax cuts while keeping the debt sufficiently stable by cutting spending $100 billion to $140 billion a year.

The risk is that higher borrowing costs and debt can limit what Trump does while keeping borrowing costs high for consumers. Lawmakers who once viewed the debt as problem years away increasingly see it as something to address now.