“Extremely dangerous”: Economists warn Trump's inflation plan could backfire for workers

In a speech last week, Donald Trump announced to his voters that if elected, he would lower prices back to pre-pandemic levels. This was met with great skepticism by economists who have studied his proposals.

“Prices are going to come down,” Trump said last week. “Look at that: They're going to come down, and they're going to come down fast, not just on insurance, but on everything.”

The Republican presidential candidate claimed he would cut gasoline, refrigerator and electricity prices across the economy. “Prices will come down, and they will come down dramatically and quickly,” he promised.

Justin Wolfers, an economist at the University of Michigan, told CNN that while this is probably exactly what Americans want to hear, it is not possible. “Undoubtedly, it is what people want to hear. And undoubtedly, it is unrealistic,” he said.

He explained that Trump is not trying to slow the rate of inflation through gradual and perhaps realistic price increases, as the Federal Reserve has done successfully over the past two years. Instead, what Trump seems to be describing is deflation.

“Deflation can only be brought about by a massive recession. That would cause companies to lower their prices,” said Wolfers. “That is extremely dangerous and has consequences in itself.”

First, if Americans knew their purchases would be cheaper next month, they would refrain from buying today. And the resulting widespread price crashes would trigger a negative feedback loop – “It's very hard to get out of a deflationary spiral,” Wolfers said.

Conversely, Kamala Harris also promises in her economic plan to reduce high costs, for example by combating excessive food prices, lowering insulin costs and the housing shortage. However, the Vice President has refrained from promising voters far-reaching price reductions, which economic experts believe would be unrealistic.

Experts believe that prices overall will not return to pre-COVID levels. We shouldn't want that, let alone promise ourselves that.

Mark Zandi, chief economist at Moody's Analytics and a 2008 adviser to Republican Senator John McCain, told CNN that broad price declines were “unrealistic and undesirable.” He added: “A deflationary environment would be a recipe for a very weak and recessionary economy.”

A better goal would be to keep inflation, which has slowed significantly this year, steady at around 2% and to raise wages at a solid pace. “If wages continue to rise faster than inflation, the pain of higher prices will become less painful with each passing month,” Zandi said.

However, if prices are cut, companies will have to start cutting wages, which would completely wipe out the comparatively cheaper goods and services. “Cutting prices sounds really exciting if I can keep my current wage. But that's not the case,” Wolfers told CNN.