Trump's inflation fantasies [Video]

If Donald Trump becomes president, he will wave a magic wand on his first day in office and, hey presto, the prices of food, energy, insurance and many other things will suddenly drop.

This is the crux of Trump's allusion to inflation, which he once blamed on President Joe Biden and now blames on Vice President Kamala Harris. When Biden was the Democratic presidential nominee, inflation, which peaked at 9% in his second year in office, was a major electoral risk. Now that Harris has replaced Biden, Trump is clearly hoping voters will transfer their anger over inflation to her.

If the president had the power to fight inflation single-handedly, you might think Biden would have done it. In fact, Biden has done just about everything possible: he's released oil from the national reserve to lower energy prices, educated retailers and producers about “corporate greed,” and tried to prevent corporate mergers that could dilute competition. Yet the rate of inflation has declined only gradually, and most of the price increases of the past three years remain.

In a free market economy driven by supply and demand, no president can do much to bring prices down. Yet Trump insists he will pursue a uniquely deflationary course. In campaign speeches, Trump regularly refers to the inflated prices of food, gasoline, electricity, insurance and housing. “Prices are going to come down,” Trump promised on August 11. “Just watch. They're going to come down and fast, not just insurance, but everything.”

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Trump specifically says he will cut the cost of auto insurance during the first 100 days of his second term. He promises to cut energy costs “in half, at least in half.” He claims his plan to deport millions of undocumented immigrants will reduce housing costs by freeing up properties that would otherwise be occupied by non-migrants.

Bullshit alert: None of this will happen. Trump will not have any special power over inflation that previous presidents lacked.

Let's start with auto insurance, which has risen 55% since Biden took office in January 2021. Auto insurance costs have skyrocketed for several reasons: Cars are increasingly equipped with sophisticated electronics that are expensive to repair. Over the same period, repair costs have risen 38%. Fatality rates have also risen since the COVID pandemic, meaning accidents are more severe and costly. Insurers are largely passing on their own higher costs to their customers.

Building insurance is also becoming more expensive as storms become more severe and repair costs rise. Some insurance companies have actually made losses on their building and car insurance because they can only increase premiums annually or half-yearly. The losses show that price gouging is not the problem.

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Most states regulate the insurance industry, so the mechanism to crack down on companies that defraud consumers is already in place. States like Florida and California have learned from soaring premiums that if insurers can't set premiums at a level that makes them a profit, they will simply leave the market. Regulators sometimes have no choice but to allow large premium increases because if they don't, no one will be able to get insurance.

How could Trump improve on what the states are already doing? Any further attempts to cap premiums would drive more insurers out of unprofitable markets. If Trump tried to force insurers to write policies at a loss, he would essentially be trying to nationalize the insurance industry, and he would lose in court. There are simply no federal tools to address this problem.

Trump's energy plan is “drill, baby, drill,” and he believes that a surge in new fossil fuel production during a second Trump presidency will drive down the cost of gasoline and electricity. In theory, increased supply usually leads to lower prices. But energy producers have a say, and they're quite happy with tighter supply and higher prices under the Biden administration.

Biden and Harris rarely point it out, but production of oil and natural gas has reached new record highs during Biden's presidency. That's not because of anything Biden did. It's because of the market. Energy companies are drilling more because they make good profits when oil prices are at $70 a barrel or more. They're also operating fewer rigs than in the past, in part because drilling has become more efficient and also because they want to keep capacity tight.

This is a complete reversal of market conditions during the Trump presidency, when drillers and their investors were willing to sacrifice their profit margins to gain market share. That strategy failed during the COVID pandemic, when oil prices collapsed and hundreds of smaller operators went out of business. The mighty Exxon Mobil (XOM) lost a staggering $22.4 billion in 2020. Since that debacle, the entire industry has focused on profitability instead of market share and on the mantra of “capital discipline.”

Trump assumes he will show the fossil fuel industry more love than Biden, and that it will produce more energy, thereby lowering prices—and profits. Not a chance. Exxon, the bellwether, posted its highest profit ever—$56 billion—in 2022, when oil prices rose above $120 and gasoline hit $5 a gallon. The same is true of natural gas, which helps determine the cost of electricity. Producers want moderately high prices that allow them to maximize profits without angering consumers. What they have learned is not to produce too much, and essentially subsidize low energy costs by taking losses, which is what they have done for much of the Trump presidency.

As for the housing market, it's possible that some housing would become available for migrants if Trump succeeded in sending millions of them back to their home countries. But that too is based on questionable assumptions. Would first-time buyers who can't currently afford homes be interested in the same properties that migrants, who often live in cramped conditions, live in? Do they even live in the same neighborhoods?

On food and other consumer goods, Trump isn't specific about how he plans to lower prices. “We'll be able to lower prices through regulation and massive supply,” he generalized on August 11. What does he mean by “regulation”? Trump calls Harris' plan to control some prices “communism,” so he probably wouldn't do that. Perhaps Trump will come up with the world's first free-market price control plan.

There's one thing Trump doesn't talk about: labor costs, which are a key reason many prices have gone up and stayed up, especially in the food industry. During Biden's term, labor costs have gone up 16%, while during Trump's four-year presidency they only went up 13%. That may sound like a swipe at Biden, but labor costs are the same as wages for workers. So wages have gone up more under Biden and Harris than they did under Trump. Wage increases tend to stick, one of the main reasons many prices have gone up and stayed up. Maybe Trump will find a magical way to get this back under control here, too.

Rick Newman is senior columnist for Yahoo FinanceFollow him on X at @rickjnewman.

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