We have called inflation “political kryptonite” because it is

so damaging to politicians. Clearly, inflation played a role in the

2024 election. So now that President Trump sits in the Oval

Office, his opponents have been trying hard to link anything and

everything in his agenda to inflation.

The first two theories involved (1) higher tariffs and (2)

deportations of illegal immigrants. As we’ve said before there is

plenty of room to debate the merits of these policies on other

grounds, but general price inflation is not one of them. Back in

his first term, President Trump raised tariffs and reduced

immigration, and CPI inflation averaged 1.9% annualized.

Yes, tariffs put upward pressure on prices for the items that

are tariffed But, unless the Federal Reserve starts increasing the

money supply faster, that will mean countervailing downward

pressure on prices for other goods and services. And what was

true in 2018 remains true in 2025.

So, what about low (or even negative) immigration?

Advocates for high immigration have always argued that

newcomers don’t take jobs away from natives or reduce their

wages because while immigrants may increase the supply of

labor, they also increase the demand for goods and services.

With both supply and demand rising, the impact of immigration

is neutral on inflation. So, if that’s true, deportations would just

reverse that, reducing both supply and demand.

Immigration surged in 2021-24 and yet inflation averaged

almost 5% per year, the most in decades. If we can have high

immigration and high inflation, we think the Fed can get to low

inflation with low immigration, as well.

So, now, with President Trump floating the idea that a

portion of any savings created by DOGE could be used to pay a

dividend to taxpayers…guess what…that’s inflationary, too!

Once again, we don’t think this makes sense. Inflation is

still always and everywhere a monetary phenomenon, as Milton

Friedman taught many decades ago. DOGE budget cuts and

DOGE dividends would not affect monetary policy.

But even if we force ourselves to think within the walls of

Keynesian theory, it still doesn’t make sense. If DOGE reduces

government spending by $1 and policymakers then send out

checks to the American public worth, say twenty cents, the

deficit would still fall by eighty cents. So even if you think

deficits cause inflation, DOGE would still be putting downward

pressure on inflation, just not quite as much as it would if all the

DOGE-related spending cuts went to deficit reduction only.

The bottom line is that regardless of whether the budget

deficit is large or small, inflation still depends on the Fed. We

can have a large budget deficit with low inflation, like after the

2008-09 Financial Panic and Great Depression, or a large deficit

and high inflation, like during and after COVID. We can also

have modest deficits and high inflation like in the 1970s or

modest deficits and low inflation like in the 1950s.

It is true that a bigger government makes inflation more

likely. Why? Because every dime the government spends is

taken from the private sector – through borrowing or taxation.

The bigger the government gets, the smaller the private sector

becomes. This reduces potential economic growth. If the Fed

reacts by printing more money to counteract this slower growth,

or if the Fed prints money to buy government debt and finance

government spending, then inflation will rise. So, DOGE, to the

extent it shrinks government will actually help boost growth and

lessen long term inflation problems.

So far, the economic impact of the Trump administration

policies is more likely to bring inflation down in the future. And

DOGE, by eliminating wasteful spending will actually help that

cause. However, the inflationary pressures unleashed by the Fed

during COVID are still not defeated. The consumer price index

was up 3.0% in January from where it was a year ago. This is

still above its average during the past few decades. But just

because you think inflation is still a problem doesn’t mean you

have to buy whatever theory partisan political advocates are

selling.