Republicans fall into the same inflation trap as Democrats

Imagine driving a car on the freeway at rush hour by looking only in the rearview mirror. Impossible, right? And yet that’s akin to how the White House and its allies want the Federal Reserve to drive monetary policy, by looking backward at the economy’s performance rather than forward.

The Trump administration would prefer the central bank ignore the reams of evidence and research proving that tariffs like the ones the president is putting on foreign goods imported into the U.S. cause the cost of those goods to rise for consumers and businesses. "It’s almost like the economics profession doesn’t fully understand tariffs," Vice President JD Vance wrote on the social media platform X last week after parts of the consumer and producer price indexes for June came in a bit below forecasts. Vance has called the Fed’s unwillingness to lower interest rates "monetary malpractice," while his boss, President Donald Trump, has taken to referring to Fed Chair Jerome Powell as "too late" for not cutting rates.

Vance’s post came a day after Oren Cass, the founder and chief economist at American Compass, a think tank that promotes conservative populism, took to X to declare that even if tariffs did cause prices to rise, that’s not inflation:

"Tariff inflation" is an oxymoron. Raising a price via an explicit policy choice is not inflation, and resulting relative price changes in the economy are not a cognizable subject of monetary policy. A Fed holding rates higher in response is politicizing its role.

Not only are such views in the deep minority and — in the case of Cass — flat out wrong (prices that are rising too fast, whatever the reason, erode real wages), they are not dissimilar to the messaging that doomed Democrats in last year’s elections, which handed control of the White House and Congress back to Republicans. Democrats tried to convince Americans that inflation had been whipped, pointing to how the velocity of price gains slowed from a high of 9% in mid-2022 to less than 2.5% a couple of months before the November elections, nearing the Fed’s 2% target. And yet, heading into the election, some 41% of Americans said inflation was their top issue, and 55% said the economy was on the wrong track, according to Bankrate’s Politics and Economy Survey last September.

It’s not that Democrats were wrong. The problem was that even though price gains had decelerated, prices on an absolute basis remained high. Indeed, the CPI rose 29.7% between the start of 2021 and October 2024. For Americans, that meant things such as homes, autos or even food remained either expensive or unaffordable. So it’s curious that the White House and its allies are employing the same strategy when Americans clearly see the situation differently. The University of Michigan’s widely followed monthly survey of consumer sentiment shows the public expects the inflation rate to surge to 4.4% over the next 12 months. That’s up from the 2.6% they expected in November.

Wall Street supports the view of households that inflation will accelerate. The median estimate of more than 50 Wall Street economists surveyed by Bloomberg is for the inflation rate to rise in the second half of 2025, averaging above 3% both this quarter and the final three months. In the bond market, where there’s actual money at stake, traders expect gains in consumer prices to rival those seen in 2022.

Among Fed policymakers, the concern is that the various measures showing high inflation expectations will become a self-fulfilling prophecy if monetary policy is loosened prematurely. It’s not as if we lack experience with such matters. This was a lesson learned the hard way by Arthur Burns, who was head of the Fed from 1970 to 1978. At the behest of President Richard Nixon, Burns in 1972 held rates too low during a temporary lull in inflation to help boost the economy to support the president’s reelection campaign. Sure enough, Nixon was reelected, but inflation roared back, accelerating from 2.7% in mid-1972 to more than 12% by the end of 1974. As a result, the 1970s weren’t exactly a great time for the economy — a painful recession lasted from 1973 into 1975, and unemployment rose as high as 9%.

Businesses say they already see input costs rising because of tariffs, which have yet to be fully implemented. The Fed’s so-called Beige Book survey of regional business contacts that was released last week noted that "in all twelve Districts, businesses reported experiencing modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction." Here’s more (emphasis mine):

Many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers’ growing price sensitivity, resulting in compressed profit margins. Contacts in a wide range of industries expected cost pressures to remain elevated in the coming months, increasing the likelihood that consumer prices will start to rise more rapidly by late summer.

To be sure, at the conclusion of the Fed’s last monetary policy meeting on June 18, the central bank said policymakers expected to lower the target for the federal funds rate twice by the end of the year, bringing it down to a range of 3.75% to 4% from the current 4.25% to 4.50%, which is where it has been since December. That’s a very dovish stance considering that the Taylor Rule — which ties the policy rate to the gaps between actual and target inflation and actual and target unemployment — suggests the fed funds target should be a bit higher.

Attempting to pressure the Fed into prematurely lowering rates by claiming there is no threat of inflation is a bad message to be sending to the public right now. Americans didn’t fall for it last year and won’t now. With the economy at full employment and the stock market at a record high, the Fed under Chair Jerome Powell can afford to be patient, waiting for more visibility into how the coming price increases will feed into broad inflation and impact the behavior of consumers and businesses. That’s called driving monetary policy by looking through the front window rather than the rearview mirror — and its very predictable outcomes.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.