Concerns Over Immigration Crackdown and Inflation
Economists are raising alarms about the potential inflationary effects of President Trump’s strict immigration policies, predicting that such measures could push inflation rates up to 4% as the labor market tightens.
The Trump administration has taken significant steps to secure the U.S.-Mexico border and cites an estimate of around 10 million undocumented immigrants entering the country during President Joe Biden’s tenure.
Additionally, thousands of undocumented immigrants have been rounded up, with plans for their deportation.
Mark Zandy, Moody’s chief economist, warns that the removal of lower-cost foreign labor will likely lead to higher prices. He noted, “If Trump maintains current deportation rates, inflation could reach between 2.5% and 4% by early next year,” as he discussed with Fortune.
An ongoing decline in the foreign-born workforce has contributed to stagnant numbers in the overall labor market since the start of the year, which, Zandy suggests, exacerbates cost pressures and inflation.
This warning comes after a notable increase in the producer price index, which rose 0.9% from June to July, marking the largest monthly uptick since 2021. Earlier this week, the consumer price index also recorded a 0.2% increase in July, amounting to a 2.7% rise year-on-year.
Zandy pointed out visible effects on prices in various sectors including meat, agriculture, food processing, and services like haircuts and dry cleaning. He claimed, “The impacts of restrictive immigration policies are evident in our consumer and producer price index figures.”
However, the White House has dismissed claims that deportation contributes to inflation. Spokesperson Abigail Jackson asserted that the administration is focused on safeguarding American jobs by exploring untapped domestic resources.
She highlighted that over 10% of young Americans are currently neither in school nor working. Since Trump’s presidency began, she noted that “100% of the wage growth has benefited American-born workers.”
White House officials pointed to an executive order from April aimed at modernizing employment programs and increasing apprenticeship opportunities to meet future workforce demands.
Currently, the U.S. faces a shortfall of 447,000 construction workers and 94,000 skilled workers expected in 2024, with estimates suggesting a growing deficit of nearly half a million workers over the next decade.
With the advancement of AI further transforming job markets, the administration’s directives intend to support over 1 million apprentices annually to address these workforce needs. Yet, some supporters of Trump are growing anxious.
Economist Steve Moore from the Heritage Foundation remarked on being “concerned about labor shortages,” acknowledging that deporting undocumented workers may impact wages and prices.
This debate has divided economists into two camps. Zandy, joined by analysts from Morgan Stanley, Barclays, and Bank of America, argues that Trump’s immigration policies are constricting the labor supply. He emphasized, “The closed border and fears surrounding deportation are driving immigrants away from work opportunities.”
Conversely, other economists believe that reduced labor demand from businesses cutting back is a significant factor. They reference evidence of decreased payrolls in production, transportation, and warehousing sectors.
While Zandy concedes that Trump’s policies may influence labor conditions, he emphasizes that diminished business confidence and weakened demand are more critical issues.
This situation is essential for the Federal Reserve, as a downturn in demand often alleviates wage pressures, allowing for interest rate adjustments. However, labor shortages resulting from immigration restrictions complicate the landscape for monetary policy, as Zandy articulated, “Demand-side inflation differs fundamentally from supply-side inflation.”
Zandy warned that the inflationary implications of restrictive immigration are typically harder to resolve than those stemming from tariffs.
He concluded, “While tariffs might yield one-time effects, restrictive immigration policies increase shortages and drive up labor costs, creating a potential for further wage inflation.” Bank of America has expressed concern over the risk of stagflation due to these issues, predicting the Fed’s stance will remain steady this year.
Currently, the market seems optimistic, with the S&P 500 nearing expectations for an interest rate cut in September. Nonetheless, bond traders are bracing for a more stringent stance from the Fed, pushing short-term Treasury yields higher as investors prepare for potentially costlier borrowing conditions.
