Ben Curtis/AP Photo
President Trump speaks to reporters as Howard Lutnick stands by, February 13, 2025, in the Oval Office of the White House.
The Consumer Price Index rose 0.2 percent in February, according to the Labor Department’s release Wednesday morning, down from 0.5 percent in January. This bit of apparent good news doesn’t yet reflect the impact of Trump’s several perverse policies, such as his trade war and his war on undocumented immigrants who perform low-wage jobs. The March inflation numbers are likely to be far worse.
Inflation for the 12 months ending in February was 2.8 percent. Core inflation, excluding food and energy prices, was 3.1 percent. Goldman Sachs researchers project that Trump’s tariffs, which are just now taking effect, will add nearly a full point to the inflation rate in 2025.
But the Federal Reserve is looking for inflation to slow to not much more than 2 percent before it resumes its series of rate cuts. That seems vanishingly unlikely.
The economy is headed for the condition known as stagflation, the rare combination of rising prices and slowing growth that destoyed the presidency of Jimmy Carter. Stagflation is unusual because in the usual dynamics, inflation and employment are a trade-off.
Low inflation goes hand in hand with low interest rates. Low capital costs and low prices lead producers to expand, consumers to spend, and investors to buy stocks. It’s a virtuous circle, until an overly tight economy leads to shortages of products and workers, raising prices and labor costs. That’s why central bankers sometimes raise rates to try to keep the economy from running too hot.
But in the 1970s, we had both high inflation and high unemployment not because of supply and demand but due to an external shock—the OPEC oil price increase, which both raised prices and slowed growth. That put the Fed in a bind.
Normally, the central bank would cut rates during a downturn, but in an extreme move to reduce inflation that had gotten embedded in the economy, Fed Chair Paul Volcker in 1979 deliberately engineered a deep recession by raising short-term rates above 20 percent.
This time, it is President Trump who is engineering a recession. His tariffs will raise prices to both producers and consumers. His mass intimidation of immigrants who do low-wage work in everything from construction to agricuture to nursing care to fast food will raise labor costs as these workers are driven into hiding or deported, and employers scramble to find replacements.
Trump’s mass firing of government workers and mass cuts in governent grants will reverberate through the economy. People who lose their jobs drastically cut their own spending. It is Keynes in reverse. Industries from airlines to autos to hotels are revising their forecasts downward.
But as in the late 1970s, this reduced economic activity will not cut prices as in the usual dynamic, because the higher prices produced by Trump’s tariff war have nothing to do with supply and demand; nor does the artificial worker shortage created by his demonizing of immigrants. And with inflation rising, the Fed’s response, as in 1979, may be to raise rates rather than cut them.
It’s a fine mess, of Trump’s own making. His policies are inconsistent, incoherent, and implusive, reflecting his own deeply impaired cognition.
Commerce Secretary Howard Lutnick has intermittently succeeded in talking Trump out of doubling down on tariffs and in talking the Canadians and Mexicans into holding off retaliating. It’s a fool’s errand. Lutnick’s reward is that Trump allies are now putting out the word that if the economy keeps going south, Lutnick will take the fall and be tossed overboard.
If a normal president embarked on a path that produced catastrophic results, his political advisers would utter the six magic words: “This will piss off the voters.”
Trump is so crazed that not even that concern deters him. Rather, he is inclined to shoot the messinger.
