Lies, Damned Lies and Trumpflation

Big worries — and some investment advice

PAUL KRUGMAN

Paul Krugman

If a pandemic breaks out, but the Centers for Disease Control and Prevention, on orders from the White House, refuse to publish data on its spread, will it still kill people?

Yes, of course. And that’s why I would be very cautious about buying TIPS — Treasury Inflation-Protected Securities.

I’ll explain the apparent non sequitur later. First, let me note that concerns about suppressed data on infectious disease aren’t hypothetical.

We currently have a major outbreak of bird flu, with serious concerns that it may already have spread to humans. Normally we’d be learning about the evolving risks from the CDC’s flagship research publication, the Morbidity and Mortality Weekly Report. But Donald Trump’s appointees have politicized the historically independent report, telling it what and what not to cover. And the agency is already suppressing reports on bird flu.

OK, I am not an expert on epidemiology, although I’ve heard enough from people who are to be very nervous. I remember Trump’s initial response to Covid, in which he showed no interest in trying to control the disease but was very eager to hold down the reported numbers — and he has much more power to suppress bad news this time around.

But while I’m not an epidemiologist, I do know something about inflation. And I’m getting very worried, not so much about the next few months as about what will happen a year or two down the road.

Wednesday’s report on consumer prices came in hot, although Thursday’s report on producer prices was more encouraging. And the Fed focuses on yet a third measure, which the people I follow expect to come in fairly benign. Monthly data are volatile, so you shouldn’t overreact to any of this. And it’s too soon to give Trump either blame or credit.

But inflation has been sticky enough that the Federal Reserve isn’t likely to cut interest rates soon, if at all, a problem for Trump, who demanded rate cuts just hours before that consumer price report:

Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!

Beyond that, during the campaign Trump didn’t just promise to reduce inflation; he promised that he would bring prices down. In August, standing in front of a table of packaged goods, he declared

Grocery prices have skyrocketed. When I win, I will immediately bring prices down, starting on day one.

Well, things aren’t looking good on that front:

And almost everything Trump is doing or threatening to do to the economy will cause higher, not lower inflation. I don’t know what if anything is going on in his mind when he asserts that tariffs will reduce prices, but tariffs are in fact sales taxes on imported goods, and does anyone think that sales taxes make stuff cheaper?

Then there are plans to deport large numbers of immigrants. Trump is reportedly angry

 that deportations aren’t moving faster and has reassigned top officials at Immigration and Customs Enforcement. If he manages to pressure them into rushing things and we see large-scale roundups of immigrants — I’m not specifying illegal immigrants, because a rushed, pressured effort is likely to sweep up many legal immigrants too — the economic impact could be devastating. Grocery prices would be hit especially hard, because both agriculture and food processing, especially meatpacking, rely on immigrants for much of their work forces.

The one piece of Trump’s economic agenda that at least sounds as if it could reduce inflation is his promise to increase energy production, presumably by eliminating environmental regulations so that fossil fuel companies can “Drill, baby, drill!”

So let’s talk about why that won’t work.

Basically, any large decline in energy prices would lead to a fall in production, driving prices right back up. In today’s world, U.S. shale oil drillers are the marginal producers — the producers whose decisions set both a floor and a ceiling on overall oil prices. As I write this, the benchmark price of U.S. crude oil — the West Texas Intermediate price — is just over $70 a barrel.

And here’s the thing: any substantial decline in prices from this point would make drilling new wells unprofitable in many U.S. oilfields:

This doesn’t mean that production would stagnate; it would decline, as older fields get exhausted.

So even if you believe, wrongly, that regulation is a major barrier to energy production, there’s no way Trump can engineer a major decline in prices.

Trump, then, obviously won’t deliver on his promise to reduce prices, which was never credible. He won’t even reduce inflation — the rate at which prices are rising. Instead, it seems highly likely that inflation will rise on his watch. This in turn means that the Fed won’t cut interest rates, as he has been demanding, and may even raise them if the inflation picture gets ugly enough.

What happens then?

Right now the Fed is a quasi-independent institution run by technocrats, who set interest rates based on their assessment of what the economy needs rather than taking instructions from the executive branch. But Fed independence rests on political norms rather than any strong legal foundation. Given the fact that Trump has already shut down USAID, a blatantly illegal move, and effectively shuttered the Consumer Financial Protection Bureau, which also looks illegal, it’s surely possible that he can find a way to force the Fed to cut interest rates even in the face of rising inflation.

Critics will point to the example of Turkey, whose authoritarian leader, like Trump, insisted that rates should go down, not up, in the face of rising inflation; the Erdogan regime didn’t reverse course until inflation was above 80 percent. But Trump surely won’t listen.

There’s also another thing populist regimes do when inflation runs hot: lie about it. While Trump isn’t a “populist” in the sense of caring about the working class, he does have a populist-style disdain for expertise. And one way to deal with bad economic numbers is to order the statistical agencies to produce better numbers. Most famously, in 2014 Argentina admitted that it had been deliberately understating inflation for the past 7 years.

Anyone who says “But they wouldn’t do that!” has clearly been living under a rock the past few weeks. We’re already seeing efforts to suppress bad news about infectious disease. Why assume that the same can’t happen to bad news about inflation? I’m just waiting for the day when Elon Musk declares that everyone who works at the Bureau of Labor Statistics is a Marxist who hates America.

Which brings me to TIPS. These are U.S. government bonds whose future repayments are indexed to the Consumer Price Index, just like Social Security checks. So TIPS protect investors against future inflation, which can erode the purchasing power of ordinary bonds.

But let’s be more precise here: TIPS protect you against future inflation that the U.S. government admits is happening. That has never been an issue in the past, because despite claims from right-wing conspiracy theorists, America has never cooked its economic books.

But there’s a first time for everything.

More DOGE hijinks: In yesterday’s post I noted that the whole condoms-for-Hamas thing came from DOGE staffers who confused Gaza province in Mozambique with the Gaza Strip. Well, as one commenter pointed out, the thing about 150-year-old Social Security beneficiaries may be another comical error. Apparently in COBOL — obsolete in the business world but still used in government — a missing date of birth is registered as 1875. Commenters on X and Threads say the same. So the only “fraud” here is the pretense that Musk’s child programmers have any idea what they’re doing.

MUSICAL CODA