By Matija Šerić
Inflation is one of the most dangerous phenomena in the economy, and at this moment it poses a serious threat to the United States, along with all its negative consequences. The newly emerging threat is a result of the economic policies of the American government. However, those in power do not want to admit it.
On Friday, September 19, the governor of the U.S. Federal Reserve, Stephen Miran, stated that he does not expect Trump’s tariffs to have an inflationary effect on the American economy. “There will always be changes in relative prices, but the question is whether this will be macroeconomically significant inflation that monetary policy should respond to,” said the governor. Miran’s pro-government stance is not surprising, considering that Donald Trump appointed him in August to replace former governor Adriana Kugler after her sudden resignation. Kugler resigned because she disagreed with Trump’s economic policy. It is unquestionable that Governor Miran is a reliable Trump ally who acts according to his boss’s instructions.
The Danger of Galloping Inflation
However, statistical data indicate that the risk of significant inflation in the U.S. is very real, and it is largely a consequence of the tariffs imposed by the Trump administration. Moreover, if negative trends continue, current inflation could develop into stagflation—a state in the economy characterized by rising prices, high unemployment, and slow (stagnant) economic growth.
Rise of inflation
Inflation is Steadily Rising
According to U.S. federal government data from the beginning of this month, in August the average inflation rate in the United States was 2.9 percent, the highest since January. Overall, consumer prices rose by 0.4 percent. Household food prices increased by 0.6%, while fuel prices jumped by 1.9 percent. The unemployment rate was 4.3 percent, which is generally not bad, but worrying is that in the first week of September, the number of people filing for unemployment benefits for the first time rose by 27,000. Housing cost inflation rose to 3.6% and is largely responsible for the overall price increase. However, the most negative impact came from the tariffs imposed by Trump on trade with other countries, where the price increases were the most significant.
Prices of products imported from overseas rose sharply: sewing machines, fabrics, and accessories (9.1%), jewelry (6.8%), instant coffee (4.9%), tomatoes (4.5%), women’s clothing (4.4%), and bananas (2.1%). It should be noted that consumer goods prices would have risen even more if numerous U.S. companies in retail and wholesale had not stocked up on products at old prices, i.e., before the new Trump tariffs came into effect. But sooner or later, the old products will run out, and managers will have to buy new products at higher prices, which American consumers will eventually feel on store shelves.
10 Cities Hardest Hit by Inflation
Large cities (metropolitan areas) worst affected by inflation include Tampa (Florida), San Diego (California), Philadelphia (Pennsylvania), Anchorage (Alaska), Los Angeles, Chicago (Illinois), Riverside (California), New York City, Phoenix (Arizona), and Baltimore (Maryland). Inflation in these urban areas rises significantly due to a combination of high housing costs, rising fuel prices, and increased import costs, all of which drive up prices of goods and services. This, of course, affects the poor most, but also the lower middle class. In metropolitan areas, any increase in energy prices is particularly harmful because people spend above-average amounts of money on commuting (often long distances) between home and work (suburbs–city centers).
Problems with Loan Repayments
Some of the largest U.S. banks note that Americans are still financially stable and that there are few signs of deterioration in the credit system so far. However, other indicators show otherwise. On September 16, the reputable credit agency Fair Isaac Corporation (FICO) reported that an increasing number of American consumers show signs of financial stress because inflation and rising interest rates reduce their purchasing power and make debt repayment more difficult. Those in the worst position are Generation Z, i.e., students who are increasingly struggling to repay student loans. More than ten percent of students with loans are late on payments. Clearly, students are the most vulnerable group.
Negative impact of Trump tariffs
The Central Bank Tries to Improve the Situation
The Federal Reserve confirmed that the situation is not good. On September 17, the Fed, led by Chairman Jerome Powell, announced that they had cut the key interest rate by a quarter of a percentage point and indicated they might do so two more times this year. Their move reflects growing concerns about the U.S. labor market, specifically rising unemployment. Lower interest rates could reduce borrowing costs for mortgages, auto loans, and business loans, and may encourage employment.
Major Risks for the U.S.
Back in April, Federal Reserve Chairman Powell warned that the new Trump tariffs were “significantly higher than expected,” with likely consequences including “higher inflation and slower economic growth,” the classic precursors of stagflation. The state of the U.S. economy is critical, and it is evident that Trump’s own tariffs on trade with China, India, Brazil, Mexico, the European Union, and other countries contributed to this crisis. Although the president sought to improve conditions in American industry, energy, and domestic production, he made life harder for ordinary Americans living paycheck to paycheck or looking for work to pay increasingly expensive rent. Businesses that import raw materials and equipment to manufacture products—such as automobiles, electronics, furniture, clothing, machinery, and food—are also at risk.
If current trends continue, the U.S. economy will not be favorable for the ruling Trump administration, especially considering next year’s midterm elections in the fall. If Democrats win the House of Representatives and the Senate, it will greatly limit the Trump administration’s powers, because without congressional approval, the government cannot pass budgets or laws. If a funding agreement for federal agencies and programs is not reached, a government shutdown could occur, as has happened before. Both parties (Republicans and Democrats) would have to reach a compromise, which is very difficult given the intense divisions in the U.S.
