Azim-Khan’s view is that if Trump’s immigration, spending, and tariff policies are taken at face value then they should place some upward pressure on inflation in both the US and Canada. That said, she believes there are mitigating factors that should allow investors to feel a bit more comfortable. Those factors can largely be found inside the US legislative branch. Despite a Republican sweep of the House and Senate in the 2024 election, Azim-Khan notes that there are players within the Republican party who may push back on some of Trump’s more populist policies. Moreover, she notes that Republican majorities are slim, giving moderates more sway.
Many of those Republicans are stated deficit hawks who may push back on some of Trump’s proposed spending and tax cuts. Azim-Khan notes that in addition to renewing some of the tax cuts implemented in his first administration, Trump seemed ready to propose a raft of new spending measures including military and border security budget increases and greater support for housing and long-term care. There has been less clarity on how he proposed to pay for that spending, beyond citing tariffs as a potential revenue generator and slashes to government spending on environmental regulations and education. Azim-Khan, however, believes that these cuts and tariffs may only partially offset the proposed spending hikes.
Any resurgence in inflation caused by that spending, Azim-Khan says, may not be greeted warmly by bond and equity markets. There is also the risk that an escalation in US deficit spending could cause a revolt by so-called bond vigilantes, who could push yields higher in a statement to policymakers that they have gone far enough.
Tariffs are a key means that Trump hopes will pay for his proposed spending. What’s been stated so far is the prospect of a 25 per cent blanket tariff on all goods coming from Canada and Mexico. Azim-Khan notes that such a high tariff is a meaningful threat to the Canadian economy. They could spark inflation in Canada, too, especially if the government responds to US tariffs with import tariffs of their own. As of now, Azim-Khan says, we are operating in an information void with no clarity on the specifics of these tariffs and if any products might be exempted from them. 25 per cent may just be a negotiating tactic. Those more moderate Republican voices, or the simple political reality that restarting inflation could damage Trump in the polls, might mean that the proposed tariffs don’t end up as damaging as some now expect.
Immigration, too, is an area where Azim-Khan sees bellicose rhetoric possibly running into a more moderate reality. While curbs to US immigration are coming, she says it’s less likely that we see the mass deportations Trump campaigned on. Moreover, immigration curbs in a tight labour market might also spark wage inflation, which could be more damaging politically and serve to shrink the tax base in an otherwise aging population.
