Trump Ran on Fighting Inflation, But Investors Are Betting He’ll Make It Worse

President-elect Donald Trump won his second term in office Tuesday after promising to fight the inflation that has hammered household budgets since 2021—however, financial markets are betting he’ll make it worse instead.

Yields on 10-year Treasurys surged Wednesday in the wake of Trump’s victory, rising as high as 4.47%, their highest level since July. Treasury yields tend to be heavily influenced by investor concerns about inflation, with higher yields signaling concerns about greater inflation risks ahead. Economists widely believe several of Trump’s policy proposals—especially his tariffs on imports—could accelerate the rising cost of living.

“We expect tariffs and tax policy will be the focus for economic policy early in a second Trump administration,” David Seif, chief economist for developed markets at Nomura, wrote in a commentary. “Tariffs are likely to be inflationary and negative for growth.”

Treasury yields also influence mortgage rates, putting upward pressure on rates that had already risen in recent weeks as traders placed bets on a Trump victory. The uptick in yields highlighted some of the potential risks to the economy in the coming Trump era, even as the S&P 500 stock index surged to a record Wednesday on optimism about how his policies could help businesses.

How Tariffs Could Push Up Inflation

Trump proposed a 60% tariff on imports from China and up to 20% tariffs on imports from all other countries. Economists widely believe that if such a tariff were imposed, merchants would pass the price increases on to consumers, pushing up price tags.

If Trump imposed his low-end agenda with just a 10% tariff across the board, core inflation as measured by personal consumption expenditures (PCE) would jump to 4% annually next year, up from its level last month of 2.7%, Jay H. Bryson and Michael Pugliese, economists at Wells Fargo Securities, said in a research note Wednesday.

Inflation could rise even more sharply if Trump were to impose tariffs at the high end of his proposals. Inflation rates would be about 2% higher in that case, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a research note. A milder scenario is also possible.

“Mr. Trump might exempt certain goods, protect certain domestic industries, or merely use the threat of tariffs as a bargaining chip in wider international relations, so the ultimate inflation hit could be much smaller,” Tombs said.

Inflation Fueled Trump’s Victory

According to voter surveys, anger about consumer price increases during President Joe Biden‘s administration was one of the main factors behind the Democrats’ loss at the polls on Tuesday.

Voters who rated the economy as their top economic concern broke for Trump 79% to 20%, according to an Edison exit poll reported by Reuters. Among the one-fourth of voters who said inflation had caused them severe economic hardship, 73% voted for Trump.

Inflation rates surged to their highest in four decades in the summer of 2022. Price increases have slowed almost to pre-pandemic rates, and wages have mostly kept up with inflation or even risen faster; however, many household budgets, especially those with lower incomes, are still hurting from the higher prices.

By contrast, inflation rates were low during the Trump administration. Numerous studies of the post-pandemic surge of inflation have pointed to the pandemic’s disruption of the global supply chain, rather than any Biden policies, as the main cause. Pandemic relief aid from the government under Trump and Biden may also have played a role.

Higher Inflation Would Spell More Expensive Loans

If Trump’s tariffs and their inflationary consequences came to fruition, the Federal Reserve would be likely to keep its benchmark interest rate higher than it otherwise would, putting upward pressure on interest rates for all kinds of loans.

The Fed cut the fed funds rate from a two-decade high in September, and is widely expected to continue reducing it. However, an inflation flare-up could derail the rate-cutting plans.

As of Wednesday morning, financial markets were pricing in a fed funds rate would most likely be set in the range of 3.75% to 4% by October 2025, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That’s down from the current range of 4.75% to 5% but 0.5 percentage point higher than the expectations a month ago.

The extent to which Trump can implement his economic policies, including cuts to taxes and regulations, could hinge on which party controls the House of Representatives, which was still undecided as of Wednesday afternoon, with several races still too close to call. However, the president has more power to impose tariffs without the approval of Congress.