High inflation helped Trump win the White House. He could be about to make it even worse

Voter discontent with high inflation is a key factor in Donald Trump's return to the White House, but his policies could once again cause inflation to soar. Republicans have repeatedly pointed to the rising cost of living in recent years, stating that he will restore the more relaxed economic environment of his first term. The slogan "Trump will fix it" is ubiquitous at his rallies.

However, since Trump's victory in the US election last week, economists have been warning about the impact of the promises he made during his campaign. "Trump's policies... have the potential to exacerbate inflation and negatively impact US economic growth," wrote AMP chief economist Shane Oliver. "His trade policies, which are likely to trigger a global trade war, will be detrimental to global economic growth."

In fact, these warnings go back further than the past seven days. In June of this year, 16 Nobel laureates in economics jointly published an open letter stating that Trump's policies "will have economic impacts for years and even decades to come." They argued that "a second term for Trump would negatively impact the US's economic position in the world and have a destructive impact on the domestic economy." One of the main concerns is the potential imposition of huge tariffs on imported goods.

"To me, the most beautiful word in the dictionary is 'tariff'," Trump said last month, "it's my favorite word." He has proposed tariffs of 10% to 20% on all imported goods, while goods made in China could face tariffs as high as 60%. While Trump says that the countries producing these goods will bear the cost, the reality is that local consumers may ultimately bear this cost and face higher prices. "These tariffs are larger and broader than the last ones, so they should cause more inflation, especially as the previous tariff increases were implemented during a period of low inflation," said CreditorWatch chief economist, Ivan Colhoun.

Furthermore, he has also promised to implement the "largest domestic deportation operation in US history," which could reduce economic output, and to extend the tax cuts he implemented in 2017. "Trump's policy platform is a series of negative supply shocks – tariffs and immigration – and demand stimulus through tax cuts," said Colhoun. "These are all inflationary factors." This could be discouraging news for Australian consumers who are just starting to see inflation return to target. However, a rise in domestic inflation during Trump's second term would not necessarily lead to a rise in the cost of living in Australia.

"Trump's election as president currently has no impact on Australia's monetary policy," said AMP deputy chief economist Diana Mousina. "Inflation is driven by 'domestic' services inflation, which is not affected by changes in US politics." Australia appears to be in a position to avoid the worst of the tariff impact, as it currently imports more from the US than it exports to the US. What is uncertain and of some concern is the potential ripple effect of high tariffs on China, which is Australia's largest trading partner.

If tariffs stifle growth in the world's second-largest economy, it would in turn reduce demand for Australian exports, although China may resort to large-scale stimulus programs. Treasurer Jim Chalmers said yesterday that he is confident that Australia can cope with the uncertainty that may arise after Trump returns to the White House on January 20th, and Mousina also believes that it is too early to sound the alarm. "There are too many 'known unknowns', and even 'unknown unknowns', it is not a time to panic," she said. "There is a famous saying now that we should 'take Trump seriously, but not literally', and it is problematic to directly predict the impact of the Trump administration on the economy right now."