Trump’s anti-immigrant, isolationist stance pumps up inflation expectations

Added 10th November 2016

President-elect Donald J Trump’s aggressive positions on immigration, infrastructure spending and isolationism could push up wage and core inflation, commentators fear.

Trump’s anti-immigrant, isolationist stance pumps up inflation expectations

Mattioli Woods director Simon Gibson’s said his “cautious position” toward the US was “vindicated” after one of the most heated presidential races was concluded early Wednesday morning. And he doesn’t intend on changing his US weighting anytime in the imminent future.

For one, Gibson suspects the tension between Trump’s anti-immigration position and job creation initiative might create problems down the line that would make the US a less attractive place to invest.

“Trump has talked about being pro-business. He has also talked about spending a lot of money on infrastructure, but given the current budget deficit, it seems unlikely that he would be able to do that. The current unemployment figures are very low, lower than they have been in the last 50 years. As such, curbing immigration and creating new jobs through decent infrastructure spending might not be so mutually compatible. We could see some wage inflation in a marginally inflationary environment so I wonder where that would leave the US economy.”

Legal & General Investment Management economist James Carrick also anticipates that Trump’s fulfilment of his promised mass immigration cuts could “exacerbate a structurally weak economy” and result in rising wage inflation.

The baby boomer generation is retiring faster than adolescents are leaving school and entering the workforce, said Carrick. So, to keep up with a rapidly expanding and less productive ageing population, growth in the labour force has had to come from elsewhere, namely, immigrants.

“Ironically, the growth in the labour force is now driven entirely by immigration,” he indicated. “This is a political hot potato and one that has underpinned Trump’s campaign.”

Unlike Federal Reserve chair Janet Yellen, Carrick disagrees that there is still ample slack in the US economy to allow ‘discouraged’ workers, spurred on by evidence of stronger economic data, to re-enter the workforce.

“When the labour market tightens and wages begin to rise, marginal workers are drawn back into the labour force,” Carrick noted. “While this extends the length of the economic cycle, our analysis suggests these marginal workers do not prevent wages from picking up. Instead, they are a symptom of rising wage inflation.

“By the end of 2017, we foresee a tight US labour market pushing up core inflation. The Fed will then be caught between trying to raise rates to dampen inflation without wishing to squeeze the indebted corporate sector too much,” he concluded.

Both Gibson and Carrick stressed that a lot could change between now and Trump’s inauguration ceremony on 20 January of next year. The Fed’s December rate hike is possible yet far from certain. And with a rising inflationary environment and tightening labour market, Trump may find the combination of his anti-immigration, protectionist and job creation mantra is ill-suited to economic climate.

As Gibson put it: “The 45th president might find himself with his hands at the wheel of the world’s largest economy but find the tyres are, seriously deflated, if not punctured.”

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