Trumpflation

Trumpflation is a term referring to the concern that inflation might increase during Donald J. Trump's U.S. presidential administration. Though whether Trumpflation develops is still in question, markets may be signaling they believe Trump will spur inflation in the U.S. dollar.

Trumpflation indicators emerged in the immediate aftermath of Donald Trump's election as president. After Donald Trump emerged as the victor of the 2016 presidential election early in the morning of November 9, markets began to indicate strongly that higher inflation was on the way. According to a Bank of America Merrill Lynch (BAML) report released the following day, rolling eight-week inflows to Treasury Inflation Protected Securities (TIPS), the par value of which is linked to the consumer price index (CPI), hit a record. Ten-year Treasury yields rose 30 basis points to 2.15% between November 8 and November 10. The result was a steeper yield curve, an indication of rising inflation expectations.

The yield curve has continued to steepen in the months since and currently stands at 3.07% as of May 30, 2018.

There are a number of reasons Trump's policies could cause a shift away from a disinflationary post-financial crisis environment. The president has promised to spend $1.5 trillion on infrastructure projects over ten years, although recent indicators suggest that an overhaul of that level is unlikely to go through. While he has separately promised to reduce or even eliminate the nation's $19.8 trillion debt, most independent analyses agree that Trump will raise deficit spending. The resulting boost to the economy is likely to spark reflation.

At the same time, Trump's (not entirely consistent) hostility to the current Federal Reserve's accommodative policy indicates that he will shift the burden of stimulus from monetary to fiscal policy. That move could signal the end of an era of central bank bond-buying (the Fed's quantitative easing program ended in October 2014, but QE continues in Japan and Europe). Forced demand for bonds has pushed down interest rates to the extent that much of the world's sovereign debt carries negative yields.

A number of Trump's other policies are seen as inflationary. Tax cuts are expected to boost after-tax incomes. Curbs on immigration are expected to push wages up. Protectionist policies are expected to raise import prices. At the same time, Trump's galvanizing effect on economic nationalists elsewhere in the rich world could see his policies emulated in other major markets.

Trumpflation is not guaranteed to happen. Trends such as continued technological innovation, an aging population and swelling global debt continue to push down prices, as BAML pointed out in an October 2017 report. The size of the national debt could also put a damper on the effects of further stimulus, keeping growth and inflation in check. Lacy Hunt, executive vice president at Hoisington Investment Management Co., told the Wall Street Journal on November 16 that from 1952 to 1999, taking on $1.70 in additional non-financial debt would lead to $1 in gross domestic product (GDP) growth. By 2015, the amount of debt needed to produce $1 in growth had risen to $4.90.