At the time of writing, President Trump is waffling about the possibility of joining Israel in its attacks on Iran. This adds yet another possible inflation risk story: crude oil prices could spike in response to snowballing conflicts in the Middle East.
To recap, there are four main inflation risks lurking over the U.S. economy.
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A large tax cut could help fuel demand.
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Tariff wars are only in a ceasefire, and high tariff rates (particularly for Chinese goods) might resume after the ceasefires expire.
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A widening of the war might result in a crude oil spike.
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Widespread deportations are cutting off some industries from labourers, particularly the agricultural industry.
If one took President Trump seriously, it would be quite easy to paint plausible scenarios about upside inflation risks. However, it is entirely possible that he could continue to flinch from taking too dangerous positions. Although I do expect him to push for a massive tax cut (Congress might not oblige), the latter three risks may not materialise.
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Although he will probably go after weaker countries and industries with tariffs, he may continue to shy away from tariffs that will hit American constituencies too hard. (I previously over-estimated his ability to ignore the yelping of Americans who lost access to cheap imported goods in the early months of the regime.)
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Although the American military and political leadership might continue to flirt with the idea that wars can be won solely by bombing a few targets, it is entirely likely that Trump would lack the fortitude to commit ground troops. Bombing a few Iranian sites would likely fail in advancing American interests in exactly the same way the bombing of Yemen did (to give a recent example from this administration, one need only examine American military history from 1942-2024 to find more examples). The current political equilibrium between Israel and Iran is that they are content to launch aerial strikes at each other, while ground operations have obvious geographical challenges. A few air raids are not enough to affect the global oil market.
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Although the Trump regime is ramping up deportations, these are mainly for achieving political objectives. It is unclear that there is the will to depopulate the workforces of farms, construction sites, and restaurants owned by Republicans.
Until President Trump acts with more resolve, the inflation outlook is caught between two forces: the mild inflationary impulses of the policies implemented (e.g., the partial tariff war) versus the disinflationary effect of policy confusion dampening growth.
Demise of the Dollar?
I have seen some comments about “the demise of the dollar” on Bluesky, but I do think that is any reason to expect any immediate seismic events. The only major concern of foreign investors are the risks of being attacked by President Trump in the form of selective default, tax extortion, or sanctions. Although those options were threatened in the early months of this year, the administration is quite obviously flailing around and it is unclear whether it has the capacity to face down the blowback such moves would create. As such, the sensible course of action is to limit exposure to the U.S. dollar, but there is no need to dump USD assets.
Vacation (?)
I am heading out for a couple of weeks to visit relatives, but I will have my computer, and so I might be able to get some writing done.
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(c) Brian Romanchuk 2024
