A faster-than-expected inflation rate for January spooked the stock market on Wednesday, with rising costs for food, shelter, and energy all combining to push inflation up to 3% for the year. Core inflation, which doesn't count two of those three factors, is actually running even hotter at 3.3% presently.
And things could be about to get even worse. Maybe much worse.
Image source: U.S. Bureau of Labor Statistics.
Trends, tariffs, and Trump
Inflation is already on the rise, you see. In fact, according to the Bureau of Labor Statistics chart up above, actual inflation (not just "core inflation") has been rising for four straight months -- long enough that I think we can start calling it a "trend."
You can't blame this on President Donald Trump, of course. (He just got the job, after all.) But two new policies announced by the president in recent weeks do promise to exacerbate the problem.
Begin with the tariffs. You've heard a lot about these already. Earlier this month, Trump announced he will levy new 25% import tariffs on America's two biggest trading partners, Canada and Mexico. (Canadian oil and gas would get hit with a small, but still substantial 10% tariff.)
Both these tariffs were almost immediately suspended after Mexico and Canada agreed to take steps to limit illegal immigration and fentanyl smuggling across the U.S. border. However, a third new tariff of 10% on Chinese imports was left in place. Additionally, on Monday the president promised to impose 25% tariffs on steel and aluminum imports -- from anywhere.
Think about the products you buy that have steel or aluminum parts in them: Everything from garden tools to washing machines to planes, trains, and automobiles. U.S. manufacturers that use these metals to make their products are going to have to pay tariffs to the government, plus the cost of the metals themselves, and they're going to need to pass these costs on to consumers to avoid losing money.
That means the prices of a whole lot of goods are going up.
Image source: Getty Images.
Trump versus the Fed
When stock investors heard the news Wednesday that inflation was going up, their natural reaction was to assume the Federal Reserve won't lower interest rates any more this year, and might even raise them. That's part of the reason why stock indexes went down on Wednesday: Low interest rates are presumed to be good for stocks, and high interest rates bad, so the worry is that if interest rates don't fall, stocks might not go up much this year.
But here's the thing. Trump said Wednesday that he actually does want the Federal Reserve to lower interest rates, and for this to happen "hand in hand with upcoming tariffs." Presumably, the reason is to ensure that higher prices created by tariffs don't slow down the economy. And granted, he said this about half an hour before the inflation report came out, and he might change his mind after seeing that inflation is running hot.
If he doesn't, though, then consumers need to be prepared to see these three factors intersect this year: rising inflation, fueled by tariffs raising the cost of consumer goods, and accelerated even more by lower interest rates (which make it easier to borrow and spend money, enabling sellers to raise prices because they know consumers have more money to spend).
Taken in conjunction, these three factors all but guarantee that inflation will rise in 2025. Now what should Americans expect when this happens?
Image source: Getty Images.
What higher inflation does
There's no great mystery here. We've all lived through the high inflation years sparked by the COVID-19 pandemic. High inflation rates mean the cost of goods and services will rise. You'll see groceries get more expensive (hurting food stocks). You'll have more trouble affording a new car (pressuring automotive stocks), too, or buying a new house (pressuring homebuilding stocks).
What worries me even more, though, is that any progress Trump and Elon Musk make at getting government spending under control by cutting waste through the Department of Government Efficiency, or DOGE, project could be imperiled by a rise in inflation rates.
Why?
Consider: In 2024, the U.S. government spent $881 billion (that's 13% of the federal budget) on interest payments on our debt. That number is already expected to rise to $952 billion in 2025 as inflation drives interest rates higher. And the interest rate on our debt is currently just 3.3%. Should inflation rise just 1 more percentage point this year, and interest rates rise in tandem, interest payments on our debt will top $1 trillion. A 2% rise in interest rates on government debt could push payments to $1.5 trillion.
That won't just be an economic disaster for the U.S. It would be a huge missed opportunity -- and a crying shame.
