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Inflation round-up: Trump policies to raise US cost of living

ECA International

With United States President-Elect Donald Trump already retreating from some of his more outlandish campaign promises, it's difficult to know for sure what economic policies he'll pursue on taking office (20 January 2017). However, among those he mentioned most in speeches were building infrastructure and cutting taxes. Leaving aside the fact that most governments would increase taxes (or borrow) to pay for infrastructure, and the serious impracticalities of building lots of stuff without a large immigrant workforce to do it (assuming Trump actually means to deport some foreigners and wall others out), if he really does both of these things, then inflation is almost certain to rise in the US.

Neither cutting taxes nor building infrastructure is necessarily a bad idea (America greatly needs the latter), but they are both expansionary and therefore inflationary. They would raise prices by increasing demand, through the creation of jobs and pay packets and by allowing people to spend greater proportions of their wages. Indeed, salaries have already begun to rise in the US. If price pressures do increase, the Federal Reserve will certainly lift interest rates to contain them. The effect on the rest of the world could be significantly negative, because the combination of more-expensive credit and more-attractive returns available in the US will mean less investment funding going abroad. Emerging markets are likely to suffer most. If Trump also follows through with other stated policies to make the US more protectionist and rip up free-trade agreements, the results could be very damaging indeed for the world economy. Globalisation and expatriation trends are likely to weaken too.

Inflation is also stirring elsewhere. Oil prices have risen lately, as OPEC countries try to forge a deal to cut production, and will go higher still if they succeed. The United Kingdom is expected to have much more substantial inflation next year as the effects of Brexit on the pound continue to play out. Rents in particular are forecast to rise sharply. Egypt's price indices are set to soar following the latest currency devaluation there and suggestions of further subsidy reductions. Mozambique's government is desperately trying to contain rapidly-rising inflation, but investors so far seem reluctant to believe that the full truth about its 'secret' borrowing has yet emerged. And Venezuela is now expected (by the IMF; see first table below) to register annual inflation of 1660.1% in 2017! The economic crisis there continues to deepen, although talks between government and opposition, if successful, may mean a catastrophic political one is avoided.

However, with the exception of oil prices, these are all situations where specific country-related circumstances are forcing prices up. Our table shows other countries with high inflation, several of which are export-led economies struggling to cope with lower commodity prices, but the wider global picture is different. The world's economy remains mired in weak demand, low growth and disinflation. This situation will almost certainly worsen if America's new president actually meant most of what he said during the election campaign. Let's hope he backtracks some more.

High-inflation countries (CPI 10%+)
Country CPI % Last reported Trend IMF 2017 forecast
Angola 40.0 Oct-16 ▲ Rising 38.3
Argentina 40.5 Apr-16 ► Stable 23.2
Azerbaijan 14.3 Sep-16 ▲ Rising 8.5
Belarus 11.2 Sep-16 ▼ Falling 12.0
Egypt 13.6 Oct-16 ▲ Rising 18.2
Ghana 15.8 Oct-16 ▼ Falling 10.0
Haiti 12.5 Sep-16 ▼ Falling 9.1
Kazakhstan 16.4 Sep-16 ► Stable 9.3
Malawi 17.4 Sep-16 ► Stable 13.9
Mozambique 25.5 Oct-16 ▲ Rising 15.5
Nigeria 19.9 Oct-16 ▲ Rising 17.1
South Sudan 682.2 Sep-16 ▲ Rising 110.7
Sudan 18.3 Sep-16 ▲ Rising 16.1
Surinam 58.0 Sep-16 ▲ Rising 30.7
Ukraine 12.4 Oct-16 ▲ Rising 11.0
Venezuela 180.9 Dec-15 ▲ Rising 1660.1
Zambia 12.5 Oct-16 ▼ Falling 9.1

All three main inflation indicators below are now in the black, having been negative for more than two years. However, average global inflation remains low, once the figures for South Sudan and Venezuela have been discounted.

Global inflation indicators
Indicator Latest Recorded One year ago Y-o-y change
Average global CPI inflation* 8.57% 21/11/16 4.21% ~
Oil price (Brent Crude) $49/brl 23/11/16 $45 +9%
All-commodities index (IMF)
(2005 = 100)
108.0 01/11/16 103.5 +4%
Food price index (UN-FAO)
(2002-04 = 100)
172.6 01/11/16 158.2 +9%
*Based on 186 ECA Cost of Living countries; no account taken of relative weightings. Extracting South Sudan and Venezuela, average global inflation is only 3.97%.

Finally, here is this month's inflation watch list:

On watch! (notable rise in inflation, but below 10%)
Country Latest CPI Data month Up from
Burundi 7.0% Sep-16 4.0% Jul-16
DR Congo 6.0% Sep-16 2.2% May-16
Guam 6.2% Sep-16 4.6% Mar-16
Iran 9.5% Sep-16 8.1% Jul-16
Liberia 9.9% Aug-16 8.4% Jun-16
Rwanda 7.4% Oct-16 5.8% Sep-16
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