Feb 19, 2025
With millions of Americans struggling with the rising cost of living, personal finance guru Dave Ramsey believes he’s spotted the primary culprit: the cost of energy.
“I don't know if people realize that 10% to 15% of the entire economy is energy and it weaves its tentacles through everything else,” the radio host told Donald Trump during an interview in 2024. “So $5 gas affects the bread truck [that’s] delivering the bread and that affects the cost of the bread then and so getting that plentiful changes everything.”
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President Trump agreed and promised Ramsey his administration would reduce energy prices by 50% within the first year of taking office.
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Several economists have raised similar concerns about the far-reaching impacts of energy prices, however, they’ve also expressed concerns about the Trump administration trade and tariff policies that may increase the cost of energy instead of reducing it.
The impact of energy prices
Ramsey doesn’t provide a source for his estimate, but according to the U.S. Energy Information Administration, the national energy expenditures increased in 2022, accounting for 6.7% of nominal gross domestic product (GDP) compared with 5.6% in 2021.
However, since energy is a major input in manufacturing and production, a spike in energy costs has knock-on effects on the price of everything else. In March 2022, Federal Reserve Chair Jerome Powell said he applied a general rule of thumb that every $10-per-barrel increase in the price of crude oil raises inflation by 0.2% and sets back economic growth 0.1%.
Consequently, a reduction in energy costs should reduce inflation as well. However, the trade war proposed by the Trump administration could have the opposite effect.
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The impact of tariffs on energy
Although the U.S. has been a net total energy exporter since 2019, it imports some types of energy, including natural gas and crude oil from other countries, including Canada.
According to the Canadian government, in 2023, Canada provided 100% of America’s imported natural gas, 60% of its imported crude oil and 85% of its imported electricity.
Which is why the Trump administration’s proposed 25% tariff on Canadian imports could raise the cost of this imported energy. In fact, the trade war could impact all inputs, not just energy.
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Tariffs on steel, aluminium, lumber and food imports would impact not only the fuel for the truck carrying bread to your grocery store, but also the cost of the truck, the shelf on which the bread sits and the wheat that’s used to manufacture the bread itself.
If implemented as proposed, tariffs on Canada, Mexico and China alone would add $1,200 to the typical American family’s annual expenses, according to the Peterson Institute for International Economics. This doesn’t include any other costs from tariffs on other countries or retaliatory tariffs.
In a recent speech, Federal Reserve Bank of Chicago President Austan Goolsbee also raised the concern that tariffs could reignite inflation in the near-term. Even if the tariffs are not implemented and inflation subsides, investors and consumers should prepare for the worst-case scenario.
Protecting your budget and portfolio
Investors and consumers worried about stubborn inflation could take a closer look at safe havens like gold. The price of a single ounce of the yellow metal recently hit $2,900. SPDR Gold Shares ETF (GLD) is a convenient option for those looking to add exposure to this asset.
Another safe haven is Treasury Inflation Protected Securities (TIPS). According to the U.S. Treasury Department, the par value of these treasuries are adjusted according to inflation on a regular basis, which means investors can use them to protect purchasing power over the long-term.
Meanwhile, consumers can potentially protect their budget by pulling forward some essential purchases and cancelling non-essential ones.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
