According to Elon Musk, inflation is “just a form of taxation” – how could Trump lower prices?

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In their now famous discussion on the social media platform X, Elon Musk and Donald Trump discussed the economy and inflation, among other things. Musk, one of the world's three richest billionaires, described inflation as a form of taxation on government spending. He proposed a “Commission on Government Efficiency” that would ensure that the government spends within its means, just as an individual with a limited budget would.

Both Trump and Democratic presidential candidate Kamala Harris have made reducing inflation a priority in their campaign promises. But will it work?

What causes inflation?

First, let's examine the causes of inflation. The price of goods rises when demand increases or supply decreases. During the pandemic, the government distributed stimulus checks and increased tax credits to many Americans. This led to increased spending. Combined with supply chain challenges that increased the cost of producing and transporting goods, the additional spending drove up prices.

At the same time, the war in Ukraine led to an increase in oil prices, which also contributed to inflation.

And as Musk pointed out, government spending also contributes to inflation. During and immediately after the pandemic, the government printed unprecedented amounts of money to cover its debt, which reduced the value of the U.S. dollar.

As Musk explained during his conversation with Trump, “Inflation is caused by excessive government spending, because the checks that the government writes never bounce. So when the government spends far more than it takes in, that increases the money supply. And when the money supply increases faster than the price of goods and services, that's inflation.”

Can Trump end inflation?

Trump has proposed curbing inflation but has not revealed any specific tactics, according to multiple news sources. He has hinted at producing more oil and natural gas to lower fuel prices, which in turn could lower consumer goods and energy prices. That could help reduce inflation, but would come at a high cost to the environment.

Trump has also announced that he wants to raise tariffs on goods made outside the U.S. and cut the corporate tax rate. Lower taxes are unlikely to stop inflation because they could lead to higher spending. They would also increase the federal deficit, which could in turn fuel inflation. However, they could also strengthen the U.S. economy by creating more jobs and increasing wages at all levels. Even if prices remained high, working Americans would be in a better position to afford the things they need and want.

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Additionally, if Congress votes to extend the Tax Cuts and Jobs Act (TCJA) while Trump is in office, that will also put more money into Americans' hands and increase the federal deficit. That too could increase inflation rather than reduce it, but it could also make it easier for Americans to absorb higher prices.

Reduction of government spending

Trump and Musk proposed a measure that could help curb inflation: reducing government spending.

In the conversation, Trump pointed out how he negotiated a lower price for Air Force One. As president, Trump could find more ways to reduce costs without cutting programs. “The federal government is bloated with overlapping agencies and redundant programs. Trump has the business sense to streamline those agencies, reduce red tape and make government more efficient,” Josh Thompson, CEO of Impact Health USA, previously told GOBankingRates.

Can any president control inflation?

While both Trump and Harris want to lower inflation and can take certain steps to achieve that, much is beyond their control. For example, interest rates have a huge impact on inflation, and that is the domain of the Federal Reserve. According to August 2024 CPI data, the inflation rate fell to 2.9% in July 2024, which, while still above the Fed's 2% target, is the lowest level since March 2021. If the Fed cuts interest rates in September, as expected, it could slow progress and keep inflation at its current level – or even increase it, depending on other factors.

But the reality is that whoever enters the White House in 2025 may not have as much control over the economy or inflation as he would like. “In general, presidents get more credit and blame for the economy than they deserve,” David Wessel, director of the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy, told CNBC.com.

_{Editor's Note on Election Coverage: GOBankingRates is nonpartisan and strives to objectively cover all aspects of the economy and present balanced reporting on politically focused financial topics. For more coverage on this topic, visit GOBankingRates.com.}