Investing.com -- Eliminating the penny could lead to higher demand for nickels, a shift that might negate any financial savings from halting penny production, Wolfe Research strategists said Tuesday.
Wolfe’s comments follow a Sunday announcement by former President Donald Trump.
“For far too long the United States has minted pennies which literally cost us more than 2 cents. This is so wasteful! I have instructed my Secretary of the US Treasury to stop producing new pennies,” Trump said in a post on Truth Social.
“Let's rip the waste out of our great nation's budget, even if it's a penny at a time.”
The US Mint reported that each penny cost 3.69 cents to produce in 2024, resulting in a net loss of 2.69 cents per coin. With 3.2 billion pennies minted last year, this led to an estimated $90 million loss.
However, the problem here, as Wolfe strategists highlight, is that eliminating the penny increases demand for nickels, which are even less cost-effective.
“Each nickel costs 13.8 cents to produce, an 8.8-cent loss per coin,” strategists highlighted.
In its report, Wolfe explores the historical context of US coinage and its evolving composition. Over time, US coins transitioned from being made of precious metals to cheaper materials such as copper alloys and zinc. However, both metals have increased in price, keeping production costs above face value.
Wolfe stresses that removing the penny from circulation could result in a shift where “30–40% of lost penny demand” is replaced with nickels in cash transactions that round up—those ending in 3, 4, 8, or 9 cents. In the firm’s base case, this would be cost-neutral if nickel demand rises to 30% of lost penny production, but a further increase could mean higher government losses.
Other countries have already phased out their lowest-denomination coins. Canada eliminated the penny in 2012, implementing a rounding system for cash transactions while keeping electronic payments unchanged. European nations, including Finland and Sweden, adopted similar approaches.
Regarding the inflationary impact, Wolfe notes that removing low-denomination coins is unlikely to drive inflation if proper rounding rules are applied.
“While some economic studies have found that eliminating the penny could impose an estimated $600 million ‘rounding tax’ on low-income consumers annually, the impact of rounding should be neutral if proper rounding rules are applied to the final transaction price, as was the case in Canada, Finland, and Sweden.”