How U.S. Elections Could Impact UK Inflation and Interest Rates

The U.S. presidential elections shape global financial markets, and the 2024 Autumn Budget underscores how UK inflation, interest rates, and economic stability could be affected. With the U.S. being the largest economy on the planet, any shifts in its leadership can cause ripple effects across global markets. But beyond the political drama, what’s really at stake for those of us in the UK is how these elections could affect our financial landscape—especially when it comes to inflation and interest rates.

Why does this matter? Well, the U.S. dollar is the world’s dominant currency, and what happens in the States doesn’t stay in the States. When policies change in Washington, they can impact everything from global trade to the price of goods and services here in the UK. This article takes a look at how the U.S. elections can indirectly shape inflation and interest rates in the UK, and why it’s worth keeping an eye on.

How U.S. Elections Influence Global Markets

The U.S. as a Global Economic Powerhouse

As the largest economy in the world, the U.S. has a huge influence over global markets. Its economic policies often set the tone for international trade, investment, and even market sentiment. So, when a U.S. election rolls around, investors, companies, and policymakers across the globe are paying attention. Why? Because depending on the outcome, we could see shifts in government spending, tax policies, and regulations—all of which can have big knock-on effects on markets, including in the UK.

Following a U.S. election, new policies like government spending, stimulus packages, or rate changes could strengthen the dollar. A strong dollar typically weakens the pound, raising import prices and increasing UK inflation. Given current UK inflation targets outlined in the budget, a stronger dollar could disrupt these aims by driving up costs for energy and commodities.

Why the World Depends on the U.S. Dollar

A big reason why U.S. elections matter so much globally is because of the U.S. dollar. The dollar isn’t just America’s currency—it’s the currency for global trade. In fact, around 60% of the world’s foreign exchange reserves are held in U.S. dollars, and commodities like oil and gold are priced in dollars too. This means that when the dollar moves, everyone feels it.

But it’s not just about currency. U.S. monetary policy also plays a huge role. The Federal Reserve’s decisions on interest rates—often influenced by political outcomes—have a global impact. When the Fed raises rates, borrowing costs in dollars go up, which can make financing more expensive for countries and companies holding dollar-denominated debt. For the UK, this means that changes in U.S. interest rates can trickle down to impact our own rates and inflation targets.

Market Reactions to U.S. Elections

Let’s face it: markets don’t love uncertainty. And that’s exactly what U.S. elections bring. In the months leading up to an election, you’ll often see more market volatility as investors try to figure out what’s coming next. Will we see a pro-business administration that cuts taxes and boosts spending, or a government that focuses on reducing deficits and imposing tighter regulations?

The answers to these questions can lead to major market shifts that impact not just the U.S., but the UK as well. Investors globally will scrutinize U.S. policies on trade, tax, and spending, reacting to any hints of protectionism, which could complicate UK inflation control efforts. Meanwhile, if policies lean toward growth and open trade, this could promote market stability, potentially aligning with the Autumn Budget's goals of maintaining economic growth.

Economic Shifts Post-Election

Once the votes are counted, the real economic changes begin. Depending on who takes control of Congress or the White House, we could see major shifts in U.S. economic policy. If the new administration prioritizes government spending (for example, on infrastructure projects or stimulus checks), this could drive up demand in the U.S. and globally, leading to higher inflation. And when inflation rises in the U.S., the impact can easily spill over to the UK.

On the other hand, if the election results in a more conservative approach—like reducing government spending or focusing on debt reduction—this could lead to slower growth but might help control inflation in the U.S., with potential knock-on effects for the UK. The key point here is that the policies chosen by U.S. leaders post-election can have a significant influence on inflationary pressures and interest rate decisions in economies closely tied to the U.S., like the UK.

Impact on UK Inflation

When it comes to inflation, the U.S. plays a major role in shaping the global picture, and the UK is no exception. While inflation is influenced by many domestic factors, like wage growth and consumer demand, external factors—particularly those coming from the U.S.—can also have a significant impact.

How U.S. Fiscal Policies Can Affect Inflation

One of the big ways U.S. elections can influence UK inflation is through changes in U.S. fiscal policy. After an election, if the new government in the U.S. decides to boost spending—whether it’s through infrastructure projects, defense spending, or stimulus checks—this can drive up demand for goods and services. This surge in demand can lead to higher global commodity prices, especially for things like oil and gas, which are priced in dollars.

If energy prices rise due to increased U.S. demand, this can push up inflation in the UK. Higher energy costs lead to more expensive transport and production, which ultimately raises the prices of goods and services for consumers. For example, if petrol prices rise due to increased global oil demand following a U.S. fiscal expansion, it can make everything from groceries to manufactured goods more expensive.

Supply Chain and Trade Disruptions

Beyond fiscal policies, U.S. elections can lead to trade disruptions, especially if the newly elected government takes a more protectionist stance. Changes in tariffs or trade agreements between the U.S. and key suppliers can have global consequences, affecting supply chains and leading to shortages or increased costs for goods.

In the UK, this could result in rising prices for imported goods, adding to inflationary pressures. For instance, if U.S. trade policies post-election create friction with China or the European Union, we might see higher costs for electronics, clothing, or other consumer goods that rely on these supply chains.

Currency Exchange and Its Role in Inflation

Another important factor is the exchange rate. U.S. elections can cause fluctuations in the value of the dollar, which in turn affects the pound. If the U.S. dollar strengthens after an election, the pound could weaken in comparison. This is bad news for UK importers, as it makes goods priced in dollars more expensive.

A weaker pound means UK consumers end up paying more for imported products like technology, food, and even fuel, which contributes to higher inflation. We saw a similar effect during the global market reactions to Brexit, and U.S. elections can have a comparable impact through currency markets, especially when the outcomes are unexpected or dramatic.

Impact on UK Interest Rates

The Bank of England (BoE) closely monitors the U.S. Federal Reserve’s decisions, especially given the budget’s focus on achieving fiscal stability. If U.S. policies lead to Fed rate hikes, a stronger dollar could pressure the BoE to adjust UK rates to stabilize the pound. Alternatively, if U.S. growth slows due to restrained fiscal policies, the BoE might avoid rate hikes, supporting the Autumn Budget's focus on economic balance.

Conclusion

For the UK, the outcomes of these elections are particularly important, as the Autumn Budget lays out a path for fiscal responsibility, shifts in U.S. economic policy could complicate these efforts, especially if inflationary pressures mount. For the UK, the stakes are high as America’s policies reverberate globally, shaping the economic landscape for years to come.

In a world that’s deeply interconnected, the policies implemented by a new U.S. administration can quickly affect the prices we pay for goods and services here in the UK, as well as the cost of borrowing. This is why financial professionals in the UK should keep a close eye on U.S. election results, as they could indirectly shape our own economic landscape for years to come.

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