Trump has no magic wand that will lower inflation

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“If everyone in town just pulls together, can we keep inflation out of our town?”

That is the question I was asked on a phone call to my office at the Federal Reserve Bank of Minneapolis one morning in 1979. I was a young economist in the bank’s research department. The caller was a representative of a special civic committee from a medium-sized city in the Ninth Federal Reserve District. The committee’s goal was to keep inflation out of their town, if possible.

The caller was so sincere that I felt he deserved more than a glib answer. So, I explained step by step. The committee would have to convince the Ford dealership not to raise its prices when the wholesale prices it paid Ford for cars rose and, eventually, to sell cars at a loss. The same held true for the local appliance store and other local merchants.

Almost all of the food in the local grocery store was produced (and priced) outside of the town. Even a sympathetic local farmer who sold corn at a stand in the fall would be facing higher seed and fertilizer prices. The local gas stations would have to agree not to raise the prices they charged both farmers and townspeople as the wholesale price of gas rose. And that was particularly difficult since, typically, they marked up a gallon of gas by only pennies.

“OK,” my caller said, “it’s impossible, isn’t it?” I sadly agreed. The reason it was impossible to keep inflation out was that prices were determined in markets outside of their town and influenced by forces outside of the control of their citizens or even their city government.

That is precisely the same reason why there is no chance that President Donald Trump will be able to deliver on his campaign promises either to lower the price of groceries in the U.S. starting as soon as he takes office or to cut the price of gasoline by half during his first year as president. The price of oil and, hence, of gas is determined in a global market. Even if the U.S. were to increase its production hoping to reduce prices, other producers, like Saudi Arabia, would almost surely reduce their output to keep prices from falling.

In like manner, grocery prices will also prove stubborn. Many of our fruits and vegetables come from Mexico, for example. And much of the other produce and many packaged foods in your local supermarket are imported; check the labels. Moreover, while my caller was hoping to merely limit the growth of prices in his town, candidate Trump was promising to actually lower prices, an even more ambitious goal.

Finally, if Trump is serious about another of his campaign promises, instituting almost universal tariffs, that policy will have the effect of raising, not lowering, the prices of many items in the grocery store. While the price of an individual grocery item could fall, say to favorable weather somewhere that produces a bumper crop, as far as reducing overall grocery prices, I must agree with my long-ago caller.

In his Time magazine interview in December, Trump expressed some doubts when questioned about grocery prices, saying, “It’s hard to bring things down once they’re up. It’s very hard.” However, later that day, in a speech at the New York Stock Exchange, he stated, “Prices are going to start coming down very soon because people can’t afford their groceries. And they are going to be affording their groceries very soon.”

Will President Trump pay a price when it becomes clear he cannot deliver on those campaign promises to reduce grocery and gasoline prices? That is a political issue on which my economics training does not provide me any special insight. When part of my job was giving speeches on the economic outlook, I always had to deal with some political questions that influenced the economic future. I was guaranteed a laugh from every audience when I warned them that a political forecast from an economist was almost as dangerous as an economic forecast from a politician.

Given the current situation in the United States, that joke has never been truer — or less funny.

Paul Anton, of Edina, is a retired economist.