In a move that has sent gilt yields into a tailspin, Donald Trump this week boasted about controlling inflation in the United States. For those of us who have watched central bank policy with a cynical eye for two decades, this is not a cause for celebration but a red flag. The self-congratulation from the White House belies a stubborn reality: inflation is not a faucet that can be turned on and off at will.
The US economy, still digesting the fiscal stimulus of the Trump era, is showing signs of overheating. The Federal Reserve, now forced to play catch-up, faces a credibility problem. Markets are beginning to price in a faster pace of rate hikes, and capital is flowing out of emerging markets at an alarming rate. The knock-on effect for the UK is clear.
The Bank of England, already walking a tightrope between taming inflation and supporting growth, now faces the spectre of imported inflation. A stronger dollar and higher US rates mean sterling weakens, pushing up the cost of imported goods. For British consumers still smarting from the cost of living crisis, this is a bitter pill.
Moreover, the government’s fiscal plans look increasingly fragile. Higher gilt yields mean higher borrowing costs, eating into the Chancellor’s headroom. The market’s patience with fiscal profligacy is running thin. If Trump’s boast leads to tighter global financial conditions, the UK’s recovery could stall before it even begins.
The bottom line: Trump’s inflation boast is a dangerous game. It shakes confidence in the very institutions that keep markets stable. For the UK, the ripple effect will be felt in higher prices, slower growth, and a Chancellor with fewer options. Brace for impact.
