As the U.S. heads into the elections on Nov. 5, economists warn that a Republican victory across the White House and Congress could significantly increase inflationary pressures.
The impact, they say, would stem primarily from higher tariffs, a swelling budget deficit and restricted immigration policies, setting the stage for a more hawkish Federal Reserve stance.
Tariffs: A Key Inflation Driver
Goldman Sachs economists Alec Phillips and David Mericle highlighted tariffs as the largest inflationary risk if Republicans take control.
In a report released in September, they projected that under a Republican sweep, tariffs on Chinese imports and autos would likely be reinstated swiftly, driving up the effective tariff rate by 3-4 percentage points (pp).
Such an increase could push core personal consumption expenditures (PCE) inflation up by 0.3-0.4 percentage points at its peak.
"Tariffs would have the largest impact on inflation," said Phillips and Mericle, noting that every 1pp increase in effective tariff rate could elevate core PCE prices by 0.1pp.
If implemented more broadly, a universal 10% tariff on all U.S. imports could have an even larger effect, potentially driving core PCE inflation to 2.75%-3%, depending on the speed of enactment.
Wider Budget Deficits Under Trump Could Be Inflationary
In addition to tariffs, the budget deficit is another critical pressure point.
Under former President Donald Trump‘s fiscal plans, the Committee for a Responsible Federal Budget (CRFB) projects that the U.S. deficit would increase by $7.75 trillion between 2026 and 2035 in a baseline scenario.
In the high-deficit scenario, Trump’s economic plans would add as much as $15.55 trillion to the national debt.
By contrast, the fiscal approach from a hypothetical Kamala Harris administration would increase the debt by $3.95 trillion over the same period, in the baseline scenario. In the high-deficit scenario, Harris’ plans would add $8.3 trillion to the debt burden.
The rising impact on inflation will be produced mainly by three channels: higher tariffs, a wider budget deficit and a lower migration.
"The Bond Vigilantes may also be voting against Washington," veteran Wall Street investor Ed Yardeni recently said, noting that regardless of the election outcome, bond investors are wary of swelling federal deficits and inflation risks.
"The next administration will face net interest outlays of over $1 trillion on the ballooning federal debt.”
Read Also: Trump Vs. Harris: How Their Fiscal Plans Could Add Trillions To The US National Debt
Higher Yields and Fed Pressures
Concerns over a widening fiscal deficit are pushing up U.S. Treasury yields, which influence borrowing costs across the economy.
Adam Turnquist, chief technical strategist at LPL Financial, observed betting market odds favoring a Trump win have moved in tandem with rising 10-year Treasury yields. This trend suggests markets anticipate more debt issuance and inflationary pressures under a potential Republican administration.
“Growing concerns over rising U.S. deficits and who will win the White House next month may also be behind the advance in yields,” Turnquist said.
Higher Treasury yields tend to increase interest rates across the economy, impacting everything from corporate loans to mortgage rates. For instance, homebuyers could face higher mortgage costs as 10-year Treasury yields rise, potentially dampening demand in the housing market.
Immigration and Labor Pressures
Another inflationary factor under a potential Republican administration is reduced immigration.
Goldman Sachs estimates that net immigration would fall to around 750,000 annually under a Republican-controlled government, compared to 1.25 million under a divided government and 1.5 million under a Harris-led administration.
A tighter immigration policy could strain the labor market by limiting the available workforce, pushing employers to raise wages to attract domestic workers.
This wage growth can, in turn, fuel inflation as businesses pass higher labor costs onto consumers. With fewer workers to fill positions, the competition for labor in certain sectors would intensify, potentially leading to elevated salary pressures across the economy.
Hawkish Fed Response Expected, But Risks Loom Large
Goldman Sachs chief economist Jan Hatzius indicated the Federal Reserve would likely adopt a more aggressive stance in response to inflationary pressures from tariffs.
"The monetary policy effects of tariffs is hawkish," Hatzius said, as higher inflation could force the Fed to hike interest rates to contain price growth.
However, raising rates in a high-debt environment is fraught with challenges. With the national debt already surpassing $33 trillion, higher interest rates would sharply increase the government's debt-servicing costs, putting additional strain on an already precarious fiscal position.
On the other hand, if the Fed chooses to accommodate government spending by holding off on rate hikes and maintaining a loose monetary policy, it risks stoking even higher inflation. Such complacency could allow price pressures to spiral, creating a dangerous feedback loop of rising inflation and mounting debt.
This delicate balancing act between controlling inflation and managing debt expenses could severely limit the Fed's flexibility, making its policy decisions increasingly challenging in an environment of persistent inflationary pressures.
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