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29 Dec 2017

Is President Donald Trump Planning to Bring Inflation Back to The U.S. Economy

In a tweet on Friday morning, Trump suggested that the United States Postal Service doesn’t charge enough to deliver packages, advantaging Amazon and others instead of the government-backed service.
U.S. President Donald Trump delivers a speech on tax reform legislation at the White House in Washington, U.S., December 13, 2017. REUTERS/Carlos Barria
“Why is the United States Post Office, which is losing many billions of dollars a year, while charging Amazon and others so little to deliver their packages, making Amazon richer and the Post Office dumber and poorer?” Trump tweeted. “Should be charging MUCH MORE!”

In fiscal 2016, the USPS lost $5.6 billion. Trump’s tweet comes just a day after the President boasted about “record” retail sales during the holiday season.

And while Trump’s tweet, and his specific mention of Amazon (AMZN), is part of his long-running feud with Amazon CEO Jeff Bezos — who also owns The Washington Post, which released the Billy Bush tape among other unflattering reports on his businesses — the economic implications of his suggestion for the Postal Service are fairly straightforward: things would get more expensive.

For years, economists and central bankers have been awaiting the return of inflation to the U.S. economy, where a 4.1% unemployment rate would have been expected to push wages higher with prices across the economy rising as a result. Instead, wage growth has been meager, prices are rising at about 1.7% year-on-year, and outgoing Federal Reserve chair Janet Yellen went so far as to call the lack of inflation a “mystery.”

Were the Postal Service to take Trump’s directive and increase prices on retailers dramatically, however, one would surely expect that this higher pricing would be passed on to consumers.

One of Amazon’s signature programs is its Prime membership, which costs $99 a year and gives customers access to two-day free shipping among other benefits. Were prices in the shipping industry to rise, the price of prime memberships could also increase. Individual goods would also become more expensive, as higher shipping costs for end consumers would likely be felt across the supply chain. Amazon, of course, would not be the only retailer likely to raise prices amid a drastic increase in shipping costs in the e-commerce industry.

Faster inflation would also imperil the current economic expansion. Mark Zandi, chief economist at Moody’s Analytics, recently told Yahoo Finance that he doesn’t expect a recession to come to the U.S. until 2020. Zandi’s view is that the tax cuts recently passed by Congress are a “raw fiscal stimulus” that will boost the economy in the short run.

But an uptick in inflation could cause the Fed to act more aggressively to raise interest rates — the Fed’s forecast has the central bank increasing its benchmark rate three times in 2018 — moving the stance of monetary policy from a gradual “normalizing” to a more aggressive tightening in order to choke off inflation. And a more aggressive Fed could sow the seeds for a recession, with money becoming more expensive and indebted corporates and consumers holding off spending to meet increasingly burdensome obligations.

All of this, of course, is not to say that Trump’s tweet will usher in a new era for the Postal Service or the U.S. economy.

In many ways, the only thing worth noting in his tweet is that Amazon — once again — is catching the President’s ire. Perhaps Amazon shareholders ought to be concerned about Trump agitating for a breakup of the company more than consumers and businesses need to be worried about inflation and a broader economic slowdown.

But the economic implication of Trump’s tweet, however, is clear. Higher costs for shipping in the economy would increase the price of goods and increase inflation. And that’s something the market isn’t ready for.

Source: YahooFinance

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