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Greg I. from Denver, CO asks: Hello Mitch, There’s quite a bit of anticipation that the economy could shift into a higher gear with lower taxes and deregulation in the new year. My question is actually about inflation. Do you think there’s a risk of the economy running too hot, which could drive prices higher and then ultimately lead to higher interest rates? Thank you.

Mitch’s Response:

Thanks for writing, Greg. Theoretically speaking, the answer to your question is a simple ‘yes.’ Cutting taxes, slashing regulation in various parts of the economy, and implementing wide-ranging tariffs could all be inflationary. The right question to ask here, however, is what these policies will look like if or when they’re enacted. Tax cuts require congressional approval and will involve negotiation, deregulation efforts will be challenged in the courts, and tariffs have historically been used by the Trump administration as negotiating tactics.

Whether or not these policies lead to an acceleration of growth in the U.S. economy remains to be seen. But the general spirit of the agenda I think could lead to more expansion, especially given that the economy is already on a strong footing.¹

Looking at your question in a different way, we could ask if there is a way the U.S. economy could accelerate without spurring an uptick in inflation. To which, I think the answer is yes, via gains in productivity. 

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In 2024, quarterly productivity in the U.S. has grown by at least 2% year-over-year, with productivity gains notched over the past five quarters. As seen in the chart below, the steady gains in productivity are consistently higher than what’s been experienced in the previous decade, excluding the immediate post-pandemic rebound—when low productivity jobs like food service were slow to come back online.

Source: Federal Reserve Bank of St. Louis³

The productivity gains in the U.S. are notable for their contrast to other developed economies like Europe and Canada, where productivity has grown by less than 1% on average over the last decade. The pandemic may have played a key role in this divergence. In America, workers were greatly reshuffled following the pandemic, with many switching jobs or taking up opportunities to work remotely, in higher responsibility roles where they could be more productive.

Another key difference between the U.S. and the rest of the world: entrepreneurship. In the post-pandemic period, there was a significant surge in new business formation in the U.S., especially in technology-driven fields—where business often happens more efficiently. Small businesses tend to make decisions more quickly and embrace fast growth, which drives productivity on a larger scale.

So, getting back to your question about whether the economy can heat up with causing a resurgence in inflation, I think the answer is yes, if we see significant productivity gains alongside the new growth. If we can increase the productive capacity of the economy without too much overheating in the labor market, I think we can avoid an inflation event.

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