Trump promises to make prices plunge again. That’s a dangerous proposal

Analysis by Matt Egan, CNN

New York (CNN) — Americans crave pre-Covid prices. Former President Donald Trump is promising to make them a reality.

“Prices will come down,” Trump told voters during a speech last week laying out his vision for a return to the White House. “You just watch: They’ll come down, and they’ll come down fast, not only with insurance, with everything.”

There’s no doubt the federal government can help influence the price of certain goods and services. However, broad-based price declines are not only improbable, they would bring about a doom loop difficult to escape from.

“Prices will come down and come down dramatically and come down fast,” he said.

Trump vowed to slash not just the price of gasoline, cooling bills and electricity, but predicted this would happen across the economy.

“Unquestionably, this is what people want to hear. And unquestionably, this is unrealistic,” Justin Wolfers, an economist at the University of Michigan, told CNN in a phone interview.

It’s one thing to try to slow the rate of inflation, making prices go up at a more gradual pace. That’s exactly what the Federal Reserve has been working to do the past two years, with a surprising amount of success.

But what Trump appeared to be describing is deflation: widespread price drops. And that’s something that scares economists because of what it portends.

“The way to bring about deflation would be to create a massive recession. That would cause businesses to start cutting prices,” Wolfers said.

But falling prices are problematic because they would stall the economy in its tracks.

‘Extremely dangerous’

If Americans know it’ll be cheaper to buy something next month, they won’t buy it today. And that would cause prices to go even lower. Rinse, repeat.

“This is extremely dangerous and feeds on itself,” said Wolfers.

Central bankers at the Fed would be alarmed to see widespread price plunges because it can become a negative feedback loop.

“The Fed would be terrified,” Wolfers said. “It’s very hard to get out of a deflationary spiral.”

Just ask Japan. Starting in the 1990s, Japan suffered a decadeslong period of economic stagnation marked by falling prices and virtually no growth.

To be sure, it’s entirely possible to have price drops for certain goods and services. That’s already happening to some extent.

For instance, gasoline prices are more than 40 cents cheaper than this point last year, according to AAA.

Over the past 12 months, prices have dropped for everything from appliances (-3.3%), furniture (-5.2%) and men’s suits (-12%), according to the Bureau of Labor Statistics.

And the overall inflation rate has dropped, too. It fell to 2.9% in July, the lowest rate in more than three years.

But that lower inflation rate does not mean prices are lower across the board. They’re still going up, just at a slower pace.

Vice President Kamala Harris has laid out her own plan to address high prices, promising new steps to fight price gouging on food, lower the cost of insulin and address the shortage of housing.

But she has not promised to bring about widespread price drops across the economy.

Economists say that overall prices across the economy aren’t going back to pre-Covid levels, nor should we be rooting for that to happen.

Mark Zandi, chief economist at Moody’s Analytics, said that broad price declines are “unrealistic and undesirable.”

“A deflationary environment would be a prescription for a very weak and recessionary economy,” said Zandi, who served as an economic adviser to former GOP Sen. John McCain when he ran for president in 2008.

Wages and inflation

The real goal is not to turn the clock back on prices, but for the economy to grow into the new level of pricing.

That would happen by ensuring that inflation remains in check (ideally around 2%) and paychecks keep growing at a solid pace.

“If wages continue to outpace inflation, the sting of higher prices becomes less painful with each passing month,” said Zandi.

By contrast, if prices really started tumbling, businesses would likely start cutting wages, too. That means Americans wouldn’t be able to take advantage of the cheaper prices.

“Bringing down prices sounds really exciting if I get to keep my current wage. But you don’t,” said Wolfers.

The ironic part about Trump’s promise to plunge prices is that some mainstream economists fear elements of his agenda would do exactly the opposite.

For instance, Trump’s plan to impose new tariffs on all US imports and 60% tariffs on Chinese goods would cost the typical middle-income household at least $1,700 a year, according to research from the Peterson Institute for International Economics.

Likewise, Trump’s vow to deport millions of people would hurt the supply of workers, threatening to drive up wages and prices.

And history shows that allowing politicians to influence central bank decisions – an idea Trump strongly supports – can also be inflationary.

That’s why 16 Nobel Prize-winning economists warned earlier this summer that the Trump agenda won’t just fail to fix inflation, it will “reignite” it.

The-CNN-Wire
™ & © 2024 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.