The top economists have issued a stark warning: Donald Trump’s immigration crackdown is limiting the labor pool in the United States and is on the brink of triggering a spiral of inflation.
Mark Zandi is the Moody’s chief economist. He told Fortune, if deportations continue at the same pace, inflation will rise from the 2.5% it currently stands to close to 4% by the time the rate reaches its highest point early next year.
Zandi’s prediction, he says, is not just theoretical. It is grounded in alarming signs that are already visible within the U.S. economic system.
He explained that the foreign-born workforce is decreasing and that the total labor force is flat.
This is causing tightening on many markets and adding costs to inflation.
Fingerprints on data
Zandi says that the evidence is indisputable. The Labor Department announced on Thursday that the Producer Price Index (PPI), a measure used to gauge wholesale inflation, rose by a savage 0.9% between June and July. This was the biggest monthly increase since 2021.
More than three quarters of the increase was due to a surge in service costs.
Zandi argues that the effect of an immigrant worker shortage is evident everywhere, including construction sites and childcare centers.
According to him, the number of legal and illegal immigrants has dropped from 4 million in roughly 2023, down to just 300,000-350,00 today. He said, “That is a huge change.”
The labor shortage is increasing costs for sectors which have relied heavily on immigrants’ labor. In the latest PPI, fresh and dried vegetable prices have risen by nearly 40%. Zandi stated that you can observe it in the meat price, agricultural, food processing and haircuts.
CPI and PPI data we received this week bear the imprint of restrictive immigration policies.
Two theories: demand or supply slump?
Zandi’s stark assessment places him firmly in the middle of an economic divide that has been growing. Two very different explanations for the economic slowdown have been proposed in the wake of the July job report, which showed weak hiring.
Zandi’s camp, which includes Morgan Stanley, Barclays and Bank of America, believes that the U.S. suffers from an extreme labor shortage.
Zandi describes the problem as a shortage of workers due to border closures, and so-called “self deportations.”
Immigrants fear. He said that they were leaving, not entering, and not working.
In this case, the Federal Reserve could keep interest rates at their current levels, since rate reductions cannot create workers by magic. Zandi said that “rate cuts will not bring in more immigrants to the United States.”
In the other camp, businesses have slowed down their hiring due to economic insecurity. Trump’s immigration policy is a secondary issue in this scenario. The Fed could be forced to lower rates to boost a weakened economy.
Concerned voices are heard
The White House has reacted strongly to the idea that its policies fuel inflation.
Abigail Jackson, a spokesperson for the White House told Fortune that the Administration is focused on “protecting the American workforce”, and tapping into the “untapped” potential of the domestic workforce. One in ten young Americans does not work or attend school.
Since Trump’s return to office “100%” of the job gains went to American-born workers, she claimed.
Even conservative voices have expressed unease. Steve Moore of the Heritage Foundation, a Trump ally and defender who publicly backed Trump’s data on economics, told Fortune that, despite his support, he was “worried” about a shortage in labor.
He admitted, “I believe the deportations could have a small impact on prices and wages.”
Zandi believes that the dangers of an insufficient labor supply are far more serious than tariffs. He described them as being “more likely one-time.”
He warned that “restrictive immigration can lead to labor shortages and higher wages, and this could become a self-reinforcing cycle.” This warning suggests that the effects of the Obama administration’s economic policies are just now beginning to be felt.
As new information becomes available, this post may change.
