Donald Trump’s efforts to address the soaring cost of living look set to disappoint US voters, with economists warning that his new administration is prioritising “America first” over beating back inflation.

Economists have revised up their forecasts for price rises this year amid signs that the president’s protectionist and isolationist agenda will raise costs and leave the Federal Reserve struggling to cut interest rates.

“The policies he’s pursuing have a high risk of inflation,” said Adam Posen, director of the Peterson Institute for International Economics think-tank. “It seems that promoting manufacturing and beating up US trade partners are goals that, for Trump, are a higher priority than the purchasing power of the working class.”

Economists now, on average, predict inflation will be 2.6 per cent this year, up from 2.2 per cent before the election, according to forecast aggregator Consensus Economics, due to the risk that Trump’s biggest policy pledges on immigration, tariffs and tax cuts, and cutting red tape could raise the cost of living.

Clampdown on immigration

Consumers grappled with price increases of more than 20 per cent during Joe Biden’s four years in office, with the worst surge in inflation in a generation forcing interest rates up to a 23-year high and costing the Democrats dearly at the polls.

But Trump maintains the high cost of living is not his administration’s primary concern. “They all said inflation was the number one issue. I said, ‘I disagree,’” he told supporters on inauguration day, arguing that immigration was a more pressing issue.

“If you really thought this guy was going to do something about the price of eggs, then you are probably going to be brutally disappointed,” said Mark Blyth, a professor at Brown University and the author of Inflation: A Guide For Users And Losers. “[His stance is] ‘We can’t give you cheap groceries, but we can give you the Gulf of America’.”

The Fed also thinks inflation under Trump will be stronger than it previously anticipated. Its quarterly “dot-plot” forecasts for December show rate-setters expected prices to rise by 2.5 per cent over the course of 2025, against an estimate of 2.2 per cent in September, before Trump was elected.

The central bank is almost certain to maintain interest rates at the target range of 4.25 per cent to 4.5 per cent at its vote on Wednesday, and the Federal Open Market Committee, which sets US borrowing costs, is expected to make just two quarter-point rate cuts this year.

If borrowing costs do not fall fast, then fresh conflict between Fed chair Jay Powell and the president looks likely.

“Trump said in Davos that interest rates are going to be lower . . . he didn’t say Jerome Powell better lower them, but it wasn’t very disguised,” said Doug Holtz-Eakin, president of the American Action Forum and chief economic policy adviser to former Republican Senator John McCain. “And I think the Fed’s unlikely to do anything but keep interest rates on hold.”

Chief among economists’ concerns is that the effect of a post-pandemic immigration boom in helping reduce inflation will go into reverse under Trump’s immigration policies.

The president’s promises to tighten border restriction, and round up and deport millions of undocumented migrants, are expected to leave construction groups across the country, and agribusinesses in south-western states, struggling to find workers.

“Regardless of where you stand on US immigration policy, there are a fair amount of workers in the construction industry that are illegal immigrants,” said Sherwin Loudermilk, president of Loudermilk Homes, an Atlanta-based real estate developer. “If Trump has mass deportations, or people get scared, then there’s going to be a void.”

Worker shortages usually raise wages, feeding into broader price pressures — although they could also lead to more investment in labour-saving technology, potentially enhancing productivity.

“Two things could save us from inflation — one is we just get an AI productivity miracle sooner than we think, and that outweighs the other stuff,” said Posen. “The other is that we get extremely unprecedented benefits from a stronger dollar.”

Tariffs and tax cuts

While a stronger dollar lowers import prices, any benefit for US consumers could be offset by higher tariffs.

Divisions between moderates, such as Treasury secretary Scott Bessent, and hawks, such as senior economic adviser Peter Navarro, make it difficult to predict what the president will do.

On the campaign trail Trump threatened to impose blanket levies of 10-20 per cent on all US imports. While that would raise prices, the impact might be shortlived, as long as other jurisdictions did not respond in kind.

“Just to put the numbers into perspective, a broad 10 per cent tariff on all US imports would raise the price level by 1 per cent,” said Ernie Tedeschi, an economist at Yale and former adviser to Biden, who added that such a rise would be a one-off shock that the Fed “would probably look through”.

Others think aggressive action by Trump on trade could delay the reduction of interest rates.

“You can’t cut the rate while a tariff is going up,” said Vincent Reinhart, chief economist at BNY Investments, who expects the next Fed cut to come in June. 

Should Trump press ahead with plans to impose a 25 per cent levy on his southern neighbour, US citrus and vegetable agribusinesses, many of which have interests in Mexico, would need to pass on costs to customers.

Trump’s plans to cut taxes have also led to concerns that he risks repeating Biden’s mistakes by contributing to the country’s yawning fiscal deficit and stoking inflation.

“There is one narrative that says US inflation was all down to the [2021] fiscal stimulus, that Biden was responsible because he spent too much on the Covid recovery,” said Nicolò Fraccaroli, a visiting scholar at Brown University, although he added that while the spending was not the only source of price pressures, it did contribute “a little bit”.

The war on red tape

Trump’s big hope for lowering inflation lies in tearing up red tape. But economists and businesses believe there are limits to how much this can cut costs for households and businesses.

“There’s a lot of evidence that deregulation boosts growth,” said Sanjay Patnaik, a senior fellow at the Brookings Institution think-tank. “But with inflation, at least to my knowledge, there isn’t much research that paints a clear line.

“It really depends on the type of regulations you’re looking at,” he added.

Trump has directed his cabinet to “marshall all powers at their disposal” to ease rules that will help tackle the soaring cost of living — including the high cost of housing.

But while construction businesses and economists widely share the president’s view that America needs more affordable homes, they are not convinced his plans to loosen regulations to tackle supply shortages will solve the problem.

“Regulations and making it easier to get permits is important, but obviously the number one thing is interest rates,” said Loudermilk.

High borrowing costs have also meant Americans are reluctant to move, leading to further shortfalls in supply.

“People don’t want to refinance from a 3 per cent mortgage to 7 per cent,” said Mahmood Pradhan, economist at Amundi. “Those costs are going to be the prevailing factor that restrains the housing market, not regulation.”

Trump has claimed his biggest deregulatory push — declaring a national energy emergency to increase domestic oil and gas production — will lower the cost of all goods and services.

But weak global demand and market caution could deter investment in additional supply.

“The oil and gas industry is reluctant to produce more than global markets can absorb right now. Precisely because they know that will cause commodity prices to drop sharply,” said James Lucier, managing director at Capital Alpha Partners, adding that there was “quite a lot of market discipline” constraining fresh drilling.

Additional reporting by Valentina Romei in London