The President of the United States has a curious new infatuation. Donald Trump, never one for conventional economic orthodoxy, has declared his ‘love’ for inflation. This is not the measured affection of a central banker for a gently rising price level, but the reckless embrace of a man who sees higher prices as a sign of strength. For those of us who remember the 1970s, this is a chilling echo. For the UK, already grappling with stubbornly high inflation and a gilt market that has regained its reputation for instability, Trump’s passion is a clear and present danger.
Let us examine the mechanics. The US economy, still the world’s largest, is running hot. Tariffs, immigration restrictions, and a fiscal deficit that would make a Keynesian blush are all stoking demand. Trump’s ‘love’ translates into policy: pressure on the Federal Reserve to keep rates low, a push for tax cuts, and a disdain for any talk of austerity. The result is a classic demand-pull inflation, where too many dollars chase too few goods. The US consumer price index is already sticky above 3 per cent, and Trump’s policies threaten to push it higher.
Now, consider the transmission mechanism to the UK. The first channel is trade. If US inflation forces the Fed to keep rates higher for longer, the dollar strengthens. Sterling, already a currency with its own problems, is caught in the crossfire. A weaker pound makes imports more expensive, directly feeding into UK inflation. The Bank of England, which has been fighting its own battle against price pressures, finds itself fighting against the tide.
The second channel is capital flows. Higher US interest rates attract global capital, draining liquidity from other markets. The UK gilt market, which suffered its own ‘mini-budget’ crisis in 2022, is particularly vulnerable. Foreign investors, already skittish about UK fiscal sustainability, will demand a higher risk premium. The yield on 10-year gilts has already crept up to 4.5 per cent. A Trump-induced spike in US yields could push that towards 5 per cent, raising borrowing costs for the government and businesses alike.
The third channel is inflation expectations. If the world’s most powerful leader declares his love for inflation, markets recalibrate. The Bank of England’s credibility, hard won over decades, is put at risk. If the market believes that central banks are now hostage to populist politics, long-term inflation expectations will drift higher. Wage demands will increase. Pricing power will be tested. The whole virtuous cycle of low inflation that we enjoyed for 30 years could be broken.
What does this mean for the UK taxpayer? Higher mortgage rates, for a start. The average fixed-rate mortgage is already above 5 per cent. If gilt yields rise further, the banks will pass on the cost. Households, already squeezed by high energy and food prices, will face another budget blow. For the government, higher borrowing costs mean less room for tax cuts or public spending. The Chancellor’s fiscal headroom, already thin, will evaporate.
And what of the stock market? A Trump-led inflation binge might boost US equities in the short term as earnings rise with prices. But for the UK, a weaker pound hits the value of sterling-denominated assets. The FTSE 100, with its international exposure, might hold up, but the domestically focused FTSE 250 will suffer. Capital flight is the real risk. If investors lose confidence in the UK’s ability to manage its own inflation, bonds will sell off, sterling will fall, and the currency crisis of 2022 will look like a dress rehearsal.
There is, of course, the possibility that Trump’s ‘love’ is just talk. He is a showman, after all. But the markets are not in the mood for romance. The bond vigilantes are sharpening their knives. If they sense that the US Treasury is not serious about fiscal discipline, they will exact a price. And the UK, with its own structural deficits and a history of currency crises, will be caught in the crossfire.
In summary, Trump’s inflation rhetoric is not just an American story. It is a global story with a painful chapter for the UK. The Chancellor should brace for a bumpy ride. The gilt market will be the canary in the coal mine. And the rest of us should remember: when the world’s largest economy falls in love with inflation, everyone pays the price.
