A top economist warned that President Trump’s crackdown on illegal immigration could heat up inflation to 4% as the labor market tightens — a notion dismissed by the White House.
The Trump administration has sealed off the southern border with Mexico, stanching the flood of the estimated 10 million illegal immigrants that entered the US under President Joe Biden.
It has also rounded up thousands of illegal immigrants and plans to deport them.
Mark Zandi, chief analyst at credit ratings agency Moody’s, predicts that the loss of cheap foreign labor will drive up prices.
“If Trump continues deporting immigrants at the current rate, inflation will go from 2.5% to somewhere close to 4% by the time it hits its peak early next year,” Zandi told Fortune.
“Foreign-born labor force is declining, and the overall labor force has gone flat since the beginning of the year. That’s causing tightening in a lot of markets, adding to costs and inflation.”
Zandi’s warning comes after the producer price index, a key inflation gauge, jumped 0.9% from June to July — the biggest monthly increase since 2021,” according to the Labor Department report last Thursday.
Earlier in the week, the consumer price index edged up 0.2% in July and is at 2.7% year over year.
“You can see it in meat prices, agriculture, food processing, haircuts, dry cleaning,” Zandi said.
“The fingerprints of the restrictive immigration policy are all over the CPI and PPI numbers we got.”
The White House rejected the idea that deportations are fueling inflation.
Abigail Jackson, a White House spokesperson, told The Post that the administration is “focused on protecting the American workforce” by utilizing “untapped potential” at home.
She pointed to data showing more than one in 10 young Americans are neither working nor in school.
Since Trump returned to office, she added, “100% of job gains have gone to native-born American workers.”
A White House official pointed to an executive order signed by the president in April which seeks to modernize workforce programs and expand apprenticeships to prepare Americans for high-paying skilled trade jobs.
The US faced shortages of 447,000 construction workers and 94,000 durable goods workers in 2024, with the Bureau of Labor Statistics projecting an annual shortfall of nearly half a million tradespeople over the next decade.
As AI advances and manufacturing reshoring accelerates, demand will grow even further, according to the White House official. Trump’s order directs the administration to support more than 1 million apprenticeships per year to meet the nation’s future workforce needs.
Nonetheless, even some of Trump’s allies are uneasy.
Heritage Foundation economist Steve Moore, who recently appeared alongside the president promoting alternative jobs data, admitted he is “worried about a labor shortage.”
“I think the deportations of working illegal immigrants could have a slight impact on wages and thus prices,” Moore said.
The Post has sought comment from Moore.
The debate has split economists into two camps.
Zandi’s side — joined by analysts at Morgan Stanley, Barclays and Bank of America — argues Trump’s deportations, border closures and what he calls “self-deportations” are choking off labor supply.
“It’s the southern border being shut down, it’s deportations, it’s self-deportations,” Zandi said.
“Immigrants are scared. They’re leaving the country, they’re not coming in, they’re not going to work.”
The opposing camp sees a different story: a real pullback in labor demand as businesses cut back. They point to shrinking payrolls in manufacturing, transportation and warehousing, along with surveys showing fewer job openings.
In that view, Trump’s policies may matter “at the margins,” Zandi conceded, but the main driver is weaker business confidence and softer consumer demand.
The split matters for the Federal Reserve. A genuine demand slowdown would normally ease wage pressures and give the Fed room to cut rates.
But if inflation is driven by labor shortages from immigration curbs, interest rates can’t solve it.
“Demand-side inflation has a different implication for monetary policy than supply-side inflation,” Zandi told Fortune.
“Rate cuts won’t bring more immigrants into the country.”
He warned the inflationary impact of immigration restrictions will be harder to shake than tariffs.
“Tariffs are more likely to be one-off,” Zandi told Fortune.
“Restrictive immigration adds to shortages, higher labor costs and wages — and that can become self-reinforcing.”
Bank of America economists echoed the stagflation risk, saying it’s why they expect the Fed to hold rates steady this year.
Markets so far have stayed upbeat, with the S&P 500 near record highs on expectations of a September cut. But bond traders are already bracing for a tougher Fed, pushing short-term Treasury yields higher.
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