Trump’s inflationary fantasies

If Donald Trump becomes president, he will wave a magic wand on his first day in office and boom! The price of food, energy, insurance and many other things will suddenly plummet.

This is the essence of Trump’s criticism of inflation, which he previously blamed on President Joe Biden and now on Vice President Kamala Harris. When Biden was the Democratic presidential nominee, inflation that peaked at 9% during his second year in office was a major electoral drag. Now that Harris has replaced Biden, Trump is obviously hoping that voters will transfer their anger about inflation to her.

If the president had the power to single-handedly end inflation, you might think Biden would have succeeded. In fact, Biden did just about everything possible: He released oil from the national reserve to lower energy prices, harassed retailers and producers about “corporate greed,” and tried to block corporate mergers that might dilute competition. Yet the inflation rate has only gradually fallen, and most of the price increases of the past three years still persist.

There is not much a president can do to lower prices in a free-market economy driven by supply and demand. Yet Trump insists that he will be uniquely deflationary. In campaign speeches, Trump routinely highlights the inflated cost of food, gasoline, electricity, insurance and housing. “Prices will come down,” he says. Trump promised on August 11th“Just watch. They will go down and they will go down fast, not just with the safety, with everything.”

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Trump specifically says he will reduce the cost of car insurance during the first 100 days of his second term. He promises to cut energy costs “in half, at least in half.” He claims his plan to deport millions of undocumented immigrants will reduce housing costs by opening up access to properties otherwise occupied by nonimmigrants.

Bullshit alert: None of this is going to happen. Trump will not have any special power over inflation that previous presidents failed to muster.

Let’s start with car insurance, which has increased 55% since Biden took office in January 2021. Car insurance costs have skyrocketed for several reasons: Cars are increasingly equipped with sophisticated electronics that are expensive to repair. Over that same time period, repair costs have increased 38%. Fatality rates have also increased since the COVID pandemic, meaning accidents are more severe and costly. Insurers are mostly passing on their own higher costs to their customers.

Home insurance is also becoming more expensive as storm severity worsens and the cost of repairs rises. Some insurance companies have been losing money on their home and auto lines because they can only adjust rates upward on an annual or semiannual basis. The losses reveal that price gouging is not the problem.

The story continues

Republican presidential candidate and former President Donald Trump speaks at the National Guard Association of the United States’ 146th General Conference, Monday, Aug. 26, 2024, in Detroit. (KeynoteUSA Photo/Paul Sancya) (ASSOCIATED PRESS)

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Most states regulate insurers, so there is already a mechanism in place to clamp down on companies that rip off consumers. Here’s what states like Florida and California have learned as premiums have skyrocketed: If insurers can’t set rates at levels that allow them to make a profit, they will simply leave the market. Sometimes regulators have no choice but to allow large premium increases because otherwise no one would be able to buy insurance.

How could Trump improve what states already do? Any additional efforts to cap premiums would cause more insurers to exit unprofitable markets. If Trump tried to order insurers to write policies at a loss, he would essentially be trying to nationalize the insurance industry and would lose in court. There are simply no federal tools to address this problem.

Trump’s energy plan is “drill, baby, drill,” and believes that a surge in new fossil fuel production during a second Trump presidency will drive down the cost of gasoline and electricity. In theory, increased supply usually drives down prices. But energy producers have a say, and they are quite happy with tighter supply and higher price levels under the Biden administration.

Biden and Harris rarely point it out, but production of both oil and natural gas has hit new record highs during Biden’s presidency. That’s not because of anything Biden has done. It’s because of the market. Energy companies are drilling more because they’re making good profits with oil prices at $70 a barrel or higher. They’re also operating Fewer drilling rigs than in the pastpartly because drilling has become more efficient and also because they want to keep capacity limited.

That’s a stark change from market conditions during the Trump presidency, when drilling companies and their investors were willing to sacrifice profit margins to grab market share. That strategy backfired during the COVID-19 pandemic, when oil prices plummeted and hundreds of smaller operators went out of business. The mighty Exxon Mobil (XOM) lost a staggering $22.4 billion in 2020. Since that debacle, the entire industry has shifted to a focus on profitability over market share and a mantra of “capital discipline.”

Trump’s premise is that he will show more love to the fossil fuel industry than Biden, and it will produce more energy, driving down prices (along with its profits). It’s a long shot. The bellwether Exxon made its biggest profit ever in 2022 ($56 billion) when oil prices peaked at $120 and gasoline hit $5 a gallon. The same is true for natural gas, which helps determine electricity costs. Producers want moderately high prices that allow them to maximize profits without angering consumers. What they have learned not to do is overproduce and basically subsidize low energy costs through losses, which is what they did for much of the Trump presidency.

As for housing, it is possible that some units could be opened to house immigrants if Trump succeeds in sending millions of them back to their home countries. But this also involves dubious assumptions. Would first-time homebuyers currently locked out of the market be interested in the same properties that immigrants live in, often in crowded conditions? Do they even live in the same areas?

As for food and other consumer goods, Trump doesn’t say exactly how he will reduce prices. “We will be able to reduce prices between regulation and having tremendous supply,” he said generally on August 11. What does he mean by “regulation”? Trump Harris’s plan to control some prices is described as “communism””, so presumably he wouldn’t. Perhaps Trump will devise the world’s first free-market price control plan.

There is one thing Trump isn’t talking about: labor costs, which are a big part of the reason many prices have risen and stayed high, especially in the food industry. During Biden’s term, labor costs have risen 16%, while they rose just 13% during Trump’s four years in office. That may sound like a knock on Biden, but labor costs are the same as workers’ pay. So wages have risen more under Biden and Harris than under Trump. Wage increases generally stick, a big reason many prices have risen and stayed high. Maybe Trump will find some magical way to reverse that, too.

Rick Newman is a senior columnist for Yahoo FinanceFollow him on X in @rickjnewman.

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