- Top economist Steve Hanke said that it's "nonsense" to think Trump's policies will spur inflation.
- Instead, inflation will depend on the Fed and the money supply, which has contracted since 2022.
- Inflation will fall below the Fed's 2% target in 2025, he predicted.
As Donald Trump's second term approaches, his policy proposals have triggered concern that inflation will see a resurgence in the coming years, but those fears are unwarranted, according to one economist.
In a CNBC interview on Sunday, Steve Hanke projected that disinflation will carry on into next year, dropping below the Federal Reserve's 2% target rate.
"All this talk about Trump's policies are going to cause inflation to kick up again is just nonsense," the top economist said. "It depends on what the Fed is doing and what the monetary policy picture looks like with the money supply."
US money supply has shrunk since 2022, which Hanke said is concerning. In the past century, the economy's total stock of money has dropped only four times, he said. Each of the four cases since 1913 was followed by either a recession or depression, as well as stagnating price growth.
"The money supply, by the way, is growing at 2.6% year-over-year, and that's below Hanke's golden growth rate of 6%, which is consistent with hitting a 2% inflation target," he told CNBC. "So inflation is going to keep coming down."
According to Federal Reserve data, the M2 supply measure has started to re-expand this year after declining from a peak in March 2022. However, its gradual comeback hasn't been enough to change Hanke's mind, as he remains convinced that a recession is coming in 2025.
"The fuel for the economy, to make it simple, is the money supply. And what's going on in the money supply? And if you get significant changes in it, you get significant changes in nominal GDP," he told NYSE TV Live earlier this month.
Trump-focused economists have largely ignored this, warning instead that Trump's promised immigration curbs, tax cuts, and protectionist trade policies will spur a price spike.
But Hanke dismissed those outlooks, and praised the incoming administration's focus on economic deregulation. In his view, less oversight will bump up GDP growth without inflationary side effects.
He also cited commentary from Scott Bessent, Trump's pick for Treasury Secretary. Bessent has suggested ways to spread out any inflationary impact from Trump's trade policies.