HAMISH MCRAE: What Trump 2.0 means for you

Looking ahead: Donald Trump

Let’s step back from all the politics and try to figure out what Donald Trump’s victory really means for our economy here. I take away two big messages, one on inflation, the other on trade.

Stand by for higher inflation in America – and that means here too. Yes, there will be a short-term boost to growth; that’s good.

But the 2 per cent target for inflation is toast. It will stay an aspiration, but when the chairman of the Federal Reserve, Jerome Powell, feels he has to say that Donald Trump can’t fire him, as he did on Thursday, you know there is trouble ahead.

US economic policy under the next president will push up inflation. There will be an even larger fiscal deficit, the price to pay for the tax cuts that Trump has promised. Tariffs on imported goods will rise, though maybe not by as much as billed. That pushes prices up. And, whoever chairs the Fed, there will be pressure for cheaper money, not just from the president but Congress. Easy credit means higher inflation.

So I can’t see any circumstances where price rises can be held down to that 2 per cent target.

It won’t be the double-digit horror of two years ago. It will be more like the creeping inflation that we got through the 1990s and early 2000s, say about 3 per cent.

That may not sound too bad, but over time it destroys wealth on a huge scale. Over 25 years, 3 per cent inflation halves the value of money. And here we have historically had a worse experience of inflation than the US. That is why the long-term trend of the pound against the dollar is down, from the $2.40 Bretton Woods benchmark in 1971 to $1.30 now. 

Our new Government is politically poles opposite from the next US administration, but its impact on inflation looks remarkably similar. 

Both want to borrow more money, and we had that warning last week from the Bank of England that Rachel Reeves’s Budget will push inflation to 2.8 per cent, nearly half a percentage point higher than it otherwise would have been.

The Bank of England may be independent, but that has not stopped prices near doubling since Gordon Brown gave it that mandate in 1997 on being named Chancellor. A pound’s worth of goods then would cost £1.92 now.

Both the Fed and the Bank of England have just cut interest rates, but higher general inflation will limit their ability to trim much further.

And governments that want to borrow more have to pay higher rates to do so. Our ten-year yield on gilts – UK Government bonds – went over 4.5 per cent last week, the highest this year. That is a straightforward message: expect higher inflation.

The story on trade is more complicated. Trump said in his campaign that he would put tariffs on foreign imports, with a 10 per cent level for the European Union and a 60 per cent level on China.

That may be scaled back, but it would be naive not to expect some increases in import duties, and maybe other controls.

That matters to Britain, because the US is our largest export market, bigger than Germany and France combined.

It would be bad for world trade, becoming one more marker in the gradual retreat of globalisation that has been running for nearly 20 years.

Yet there are two reasons why UK trade may do reasonably well under a Trump presidency.

One is that we are not in the EU. We are not caught up in the visceral hatred that Trump exhibits towards Europe. As he put it: ‘They don’t take our cars, they don’t take our farm products, don’t take anything.’

Well, actually the UK does take a lot of America’s stuff: some £116 billion of imports in the year to June 30, 2024. That can rise with good-natured negotiation.

The other is more general. Globalisation is gradually shifting from trading in goods to trading in services. The US is the largest exporter of services, the UK the second largest.

It is in our mutual self-interest to boost international trade in services. That is the project we need to work on together.

I hope our Government realises there is a prize to be grasped – and grabs it.