Trump Immigration Inflation Warning
Hello! Today, I've brought this topic to you! We're diving deep into a fascinating, and somewhat concerning, economic prediction that links immigration policy directly to your wallet. You might think about inflation in terms of gas prices or grocery bills, but what if the very policies on who can work in the country are having a massive, unseen impact? That's exactly what a top economist is now warning about. Let's explore this critical connection.
According to Mark Zandi, the chief economist at Moody’s, former President Donald Trump’s new immigration policies – specifically the deportation of an estimated 750 immigrants per day – are directly contributing to a surge in prices. Zandi warns that if this rate of deportation continues, inflation could jump from its current 2.5% to nearly 4% by early next year.
His stark prediction isn't just a guess; it's rooted in recent economic data. Zandi points out that the "foreign-born labor force is declining, and the overall labor force has gone flat since the beginning of the year." This scarcity of workers, he argues, is tightening various markets, which inevitably leads to increased costs and, you guessed it, inflation.
We've already seen signs of this. The Labor Department recently reported that the producer price index (PPI) – which measures wholesale inflation before it reaches consumers – surged by 0.9% from June to July. This was the biggest jump since 2021! A significant portion of this increase, about 1.1%, was attributed to the rising cost of services. This trend aligns with earlier data showing a tick-up in the core consumer price index as well.
Of course, not everyone agrees with Zandi's assessment. The White House has pushed back on the idea that deportations are fueling inflation. Their argument centers on tapping into the "untapped potential" within the domestic workforce. White House spokesperson Abigail Jackson highlighted that more than one in ten young Americans are neither working nor in school. She stated that the administration is "focused on protecting the American workforce" and ensuring that job gains benefit native-born workers. In fact, she claimed that since Trump returned to office, "100% of job gains have gone to native-born American workers."
However, even some economists who have aligned with Trump, like Heritage Foundation economist Steve Moore, acknowledge a potential issue. While parading alternative jobs data alongside Trump recently, Moore admitted he is "worried about a labor shortage" and believes that "the deportations of working illegal immigrants could have a slight impact on wages and thus prices." This suggests a broader concern about labor supply, even among those who support the administration's policies.
Zandi's strong remarks highlight a growing split among economists, especially after a July jobs report showed unexpectedly low job creation and significant downward revisions for previous months. This divergence has led to two main "camps" of thought:
Camp 1: The Supply-Side Constraint (Zandi's View)
This camp, which includes major players like Morgan Stanley, Barclays, and Bank of America, argues that the slowdown in hiring isn't due to a lack of demand, but an artificial constraint on labor supply. Zandi attributes this to:
- The southern border being effectively shut down.
- Direct deportations.
- "Self-deportations," where immigrants, fearful of policies, leave the country voluntarily.
He estimates a dramatic drop in annual immigrants (both legal and undocumented) from roughly 4 million at its 2023 peak to a mere 300,000–350,000 currently. "That’s a massive change," Zandi stresses, which he believes is "significantly lifting the cost" in sectors heavily reliant on immigrant labor. Think about industries like:
- Construction
- Agriculture
- Manufacturing
- Transportation and Distribution
- Hospitality and Retail
- Elder care and Child care
- Other personal services
Real-world examples are already emerging: Fresh and dry vegetable prices, for instance, surged almost 40% in the latest PPI report. While tariffs and weather play a role, Zandi insists that immigration restrictions are a major culprit. He sees "the fingerprints of the restrictive immigration policy... all over the CPI and PPI numbers we got this week," citing examples like meat prices, agriculture, food processing, haircuts, and even dry cleaning. If this diagnosis is correct, Zandi believes the Federal Reserve can hold interest rates steady without triggering mass layoffs, as the problem stems from a lack of available workers, not collapsing demand.
Camp 2: The Demand-Side Slowdown
Conversely, the second camp argues that the economy is experiencing a genuine slowdown in labor demand. They believe businesses are pulling back on hiring due to broader economic uncertainty. They point to shrinking payrolls in sectors like manufacturing, transportation, and warehousing, along with surveys indicating fewer job openings. In this scenario, Trump's policies might be a factor "at the margins," as Zandi himself admits, but the primary drivers are waning business confidence and softer consumer demand.
This distinction between supply-side and demand-side labor issues is crucial for monetary policy. Typically, a drop in labor demand would ease wage pressures and inflation, giving the Fed room to cut rates. However, the recent data – showing both slower hiring and rising prices – creates a muddy picture for policymakers.
Zandi issues a stern warning: immigration-driven inflation is a supply-side shock. This means it's not something that can be easily fixed by simply adjusting interest rates. As he puts it, "Rate cuts won’t bring more immigrants into the country." He also argues that the inflationary effects of immigration restrictions will be far more persistent than those of tariffs. "Tariffs are more likely to be one-off," Zandi explains, "Restrictive immigration adds to shortages, higher labor costs and wages — and that can become self-reinforcing."
Economists at Bank of America echo this concern, specifically pointing to a risk of "stagflation" (stagnant growth combined with inflation), which is why they anticipate the Fed will avoid cutting rates this year. While markets have largely taken the latest data in stride, with the S&P 500 hovering near record highs on expectations of a September rate cut, bond traders are starting to price in a slightly more hawkish Fed, pushing short-term Treasury yields a touch higher. This suggests a growing recognition of the unique challenges posed by this type of inflation.
So, what's the path forward according to Zandi? He believes that easing immigration restrictions could rapidly help bring inflation down. "If we had a rational immigration policy where we allowed immigrants of all skills into the country, that would be a game changer," he asserts. He highlights the outsized role immigrants play in entrepreneurship and innovation, suggesting their presence could significantly boost economic productivity and alleviate inflationary pressures.
As for whether the White House will acknowledge this direct link between deportations and inflation, Zandi wouldn't speculate. He simply notes that "Tariff inflation is not at the top of the list of reasons why they’re pursuing the restrictive immigration policy," implying that the motivations behind current immigration policies are likely far more complex and political than purely economic.
Q2. How does the White House counter the claim that deportations are fueling inflation?
A. The White House argues they are focused on tapping "untapped potential" in the domestic workforce, stating that 100% of recent job gains have gone to native-born American workers.
Q3. What are the "two camps" of economists debating about the current labor market slowdown?
A. One camp (led by Zandi) believes it's due to a constrained labor supply caused by immigration policies, while the other believes it's a genuine slowdown in labor demand due to economic uncertainty.
Q4. Why does Mark Zandi consider immigration-driven inflation more concerning than tariff-driven inflation?
A. He states that tariffs are more likely to be "one-off," whereas restrictive immigration policies lead to persistent shortages, higher labor costs, and wages, which can become self-reinforcing.