Trump Deportation Policy Could Push Inflation to 4% by 2026

Trump's administration is implementing stringent immigration policies, including deporting an average of 750 immigrants per day, which could significantly influence inflation trends in the coming year, according to Mark Zandi, chief economist at Moody’s. Zandi warns that if these policies continue at the current pace, the inflation rate could rise from 2.5% to nearly 4% by early next year [1].

The economist bases his prediction on recent inflation data, noting that the foreign-born labor force is shrinking, while the overall labor force has stagnated since the beginning of the year. This labor shortage, he argues, is tightening markets and increasing costs, thus fueling inflation [1]. The Labor Department's latest report highlights the issue: the producer price index (PPI) rose 0.9% in July from June, the largest jump since 2021, with a 1.1% rise in service costs accounting for the majority of the increase [1]. This follows a 0.2% uptick in the core consumer price index earlier in the week [1].

The White House, however, disputes the claim that deportations are driving inflation. A spokesperson, Abigail Jackson, stated the policy is part of an effort to unlock “untapped potential” in the domestic workforce, with 100% of recent job gains going to native-born workers [1]. The administration also emphasized that one in ten young Americans is currently neither working nor in school, suggesting there is untapped labor to be drawn from within the country [1].

On the other hand, Steve Moore, an economist with the Heritage Foundation, expressed concern about the potential labor shortages caused by deportations and their possible effect on wages and prices [1]. This has sparked a growing divide among economists. Zandi and others, including analysts from Morgan Stanley and Barclays, argue that hiring has slowed due to artificial constraints on labor supply from Trump’s policies, border closures, and so-called “self-deportations” [1]. Zandi estimates that the annual number of immigrants, both legal and undocumented, has dropped from 4 million in 2023 to between 300,000 and 350,000 currently [1].

Zandi highlighted that sectors heavily reliant on immigrant labor—such as construction, agriculture, and personal services—are experiencing significant cost increases. For example, fresh and dry vegetable prices surged nearly 40% in the latest PPI report [1]. He attributes these trends to immigration restrictions rather than tariffs or weather-related factors [1].

The debate has important implications for Federal Reserve policy. Zandi argues that immigration-driven inflation is a supply-side issue, which cannot be easily addressed by interest-rate adjustments. In contrast, a slowdown in labor demand typically eases wage pressures and allows for rate cuts. The current data, however, complicates this picture, as both hiring and prices are rising [1].

Zandi also warned that the inflationary impact of restrictive immigration policies may be more persistent than that of tariffs, as they lead to sustained labor shortages, higher wages, and increased costs. These effects can become self-reinforcing over time [1].

To address the issue, Zandi called for a more rational immigration policy that allows in immigrants of all skill levels. He emphasized the role immigrants play in entrepreneurship and innovation, suggesting such a policy could significantly alter the economic landscape [1].

Source: [1] Trump is deporting so many immigrants that it could cause inflation to hit 4% next year, top economist says (https://fortune.com/2025/08/16/trump-deportation-immigration-inflation-2026/)