US INFLATION
National Economic Council Director Kevin Hassett, told CNBC in an interview today that President Trump "wants inflation under control...to do that, you have to increase supply and reduce aggregate demand. So you got to cut spending and you got to increase supply."
- Targeting an increase in supply is a major theme of the 2nd Trump administration, with senior officials all expressing the view that the US can enjoy stronger growth with lower inflaiton amid supply side gains.
- Hassett appears to go a little further than this in his specific mentioning of reducing "aggregate demand" in conjunction with higher supply in order to subdue inflation. He appears to have been referring mainly to a reduction in government spending - another key theme of the Trump administration's early policy drive - but the use of the term "aggregate demand" (mentioned at least twice today) for a seasoned economist makes one wonder whether the administration is becoming increasingly comfortable with the idea of a pullback in economic activity in the short run to get inflation down and get productivity and output up over the longer run.
- That's especially the case for the short-term impact of a reduction in government payroll and spending reductions (other Trump officials have highlighted that high government spending under the Biden administration was a key boost to growth).
- Hassett's supply-side comments pointed largely to the labor market: "The way you increase supply is you lower the marginal tax rate on labor, and you lower the marginal tax rate on new investments. And so for labor, if you look at the people who aren’t working who really want to be, it’s people who have really ridiculously high Social Security tax rates. If we’ve got somebody who can work more overtime, that’s increased labor supply, that helps them make a higher income, and it helps reduce inflation, because we have more supply."
- Overall participation has been in a longer-term downtrend. The prime-age labor force participation rate rose from 81.5% to 83.1% over the course of the first three years of the Trump administration, until it collapsed with the pandemic in early 2020 - but having recovered from there, now it's at the highest levels in over 20 years (83.5%). Overall participation rates remain below pre-pandemic levels (62.6%), and only t icked up slightly under the 1st Trump administration. That's largely due to a falli in post-pandemic participation by those aged 55+ (down 2pp).
- The argument is on stronger ground on getting more hours out of employees: average weekly hours dropped to 34.1 in January's employment report, joint-lowest since 2010.
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