The man who promised to make America great again appears to be making its cost of living greater still. US inflation has surged to its highest level in three years, a development that has sent shivers through Threadneedle Street and the Treasury. President Trump’s unconventional affection for rising prices, which he has described as ‘beautiful’, is causing genuine alarm among British economists who see the transatlantic price spiral as a precursor to trouble at home. The latest consumer price index reading came in at a blistering 4.2 per cent year on year, far above the Federal Reserve’s 2 per cent target and well ahead of market expectations. Core inflation, which strips out volatile food and energy costs, also overshot. The data, released on Wednesday, confirmed that the post-pandemic economic rebound is now colliding with supply chain bottlenecks and, crucially, the impact of Trump’s fiscal stimulus.
For the City of London, this is not an abstract concern. British gilt yields have already begun to rise in sympathy with US Treasuries, pushing up the cost of government borrowing. The Bank of England, which had been tentatively signalling a possible rate hike later this year, now faces a more complex calculus. If US inflation forces the Federal Reserve to tighten policy aggressively, the BoE must either follow suit or risk a collapse in sterling. A weaker pound might be welcome for exporters, but it also imports inflation, hitting the pocketbooks of British consumers already grappling with rising energy bills and council tax.
The irony is that Trump’s love for inflation is rooted in a populist disdain for the orthodoxy of independent central banks. He has repeatedly called for negative interest rates and accused Fed chair Jerome Powell of being ‘too tight’. Yet the market’s reaction to this week’s figures has been swift and unforgiving. The S&P 500 fell sharply, with tech stocks particularly hard hit as investors repriced the future value of earnings. The dollar rallied, a sign of capital seeking safety, but that safety may prove illusory if the inflationary dynamic becomes entrenched.
For the UK, the threat is nuanced. Our own inflation rate has been ticking up, but remains lower than America’s. The real danger is that US price pressures become embedded in global supply chains, raising costs for British manufacturers. Moreover, the sell-off in US bonds is spilling over into UK gilts, with the 10-year yield rising above 1.5 per cent for the first time in a month. That is bad news for the Chancellor’s fiscal headroom.
The government’s response has been characteristically cautious. A Treasury spokesperson said they were monitoring the situation closely, but stressed the UK’s own recovery was on track. That is the kind of statement that does not fool the markets. The bottom line is that inflation is the tax nobody voted for, and Trump’s apparent enthusiasm for it is a gift to the opposition.
If the US continues to overheat, the BoE may have to act sooner and more aggressively than it would like. That means higher mortgage rates for homeowners and a squeeze on consumer spending. For a prime minister whose entire political project is based on levelling up, rising inflation is a poison pill.
The market’s verdict is clear: Trump’s love is dangerous. British economists are right to be alarmed.
