Where will the buck stop?

US inflation unexpectedly increased to 3% in January, driven by surging egg prices, it reached its highest rate in the past 6 months. 

This comes despite the Federal Reserve’s recent change in tack. Since their sharp increase in 2022, The Fed had started cutting interest rates. However, as inflation began to tick back up away from their 2% target, they resumed their war against inflation by keeping interest rates high.

By keeping interest rates higher, borrowing becomes more expensive and saving becomes more appealing, placing downward pressure on prices and cooling down the U.S. economy. Or so the Fed hopes.

This is problematic for Trump, who put tackling inflation at the centre of his election campaign but also wants to pursue policies fundamentally contradicting that goal such as tariffs and immigration.

Tariffs in particular can place significant upward pressure on prices, especially if they lead to a full-blown trade war. This can also be particularly burdensome on lower-income consumers and thin-margin operations such as value retailers who both utilise a disproportionately large amount of cheap imported goods. For a full exploration of this idea, see our Dollar Tree Article.

Jerome Powell, Chair of the Federal Reserve, shares this viewpoint, reporting on Wednesday that Trump's policies may “hinder the disinflation process”.

Despite this, Trump has repeatedly called for lower interest rates from the Fed, simultaneously pushing the blame for inflation on them. Trump took to his own social media platform, Truth Social, to accuse the Federal Reserve of “fail[ing] to stop the problem they created with inflation".

The Fed has been largely unfazed by this pressure, repeatedly expressing that they are in no rush to change interest rates, whilst passing back some of the blame to Trump for their apprehensiveness to cut rates.

The Fed’s report said that “it might be especially difficult to distinguish between relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of new government policies”. This highlights that Trump’s fast-moving policy approach has led to an inability to distinguish underlying inflation (essential to the Fed’s decisions) against that which is short-term and reactionary to Trump's barrage or post-inauguration policies (given less weight in the Fed’s decisions).

Some have called into question whether the Fed has truly been unfazed by Trump though. Powell stated that he had “no contact” with Trump and that the central bank would continue “doing [its] job and stay out of politics”.

Despite this, the Fed recently withdrew from a group of central banks focused on climate change and Powell has failed to comment on how diversity programs will be handled following recent executive orders signed by Trump against them. Both distinctly pro-Trump shifts in the operation of the Fed.

However, some inflationary factors cannot be controlled by Trump or the Fed. Notably, the price of eggs. 

Egg prices are up 15% over the past month, according to the Labor Department, this is the biggest monthly increase in over a decade. Egg prices are part of many inflation statistics, contributing to the uptick in the U.S.

The price of a dozen eggs over the past 10 years. Source: USDA.

This is largely due to avian flu, which has been responsible for the purging of Chicken Farms across the States. Price rises have been so drastic that some restaurants, including chains such as Waffle House, have added a temporary 50-cent surcharge per egg.