He says 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 says his stark prediction is based on recent inflation data. “Foreign-born labor force is declining, and the overall labor force has gone flat since the beginning of the year,” he added. “That’s causing tightening in a lot of markets, adding to costs and inflation.”

The Labor Department reported Thursday that the producer price index (PPI)—a measure of wholesale inflation before it hits consumers—rose 0.9% from June to July, the biggest jump since 2021. Compared with a year earlier, wholesale prices were up 3.3%.

A jump in the cost of services—about 1.1%—accounted for more than three-quarters of the increase in the PPI. This follows data earlier in the week showing the core consumer price index ticked up 0.2%.

The White House pushed back on the idea that Trump’s deportations are fueling inflation, framing the crackdown as part of an effort to tap “untapped potential” in the domestic workforce. Spokesperson Abigail Jackson said more than one in 10 young Americans are neither working nor in school, and told Fortune the administration is “focused on protecting the American workforce” and ensuring job gains go to native-born workers. 

Since Trump returned to office, she added, “100% of job gains have gone to native-born American workers.”

However, Heritage Foundation economist Steve Moore, who recently paraded alternative jobs data next to Trump, told Fortune he is nonetheless “worried about a labor shortage.”

“I think the deportations of working illegal immigrants could have a slight impact on wages and thus prices,” he said. 

Two camps, two very different diagnoses

Zandi’s remarks place him firmly on one side of a growing split among economists since a shock July jobs report showed very low job creation and steep downward revisions to prior months. 

His camp—which also includes Morgan Stanley, Barclays and Bank of America—argues hiring has slowed because the labor supply has been artificially constrained by Trump’s deportations, border closures, and what Zandi calls “self-deportations.”

“It’s the southern border being shut down, it’s deportations, it’s self-deportations,” he said. “Immigrants are scared. They’re leaving the country, they’re not coming in, they’re not going to work.”

He estimates the annual number of immigrants, legal and undocumented alike, has fallen from roughly 4 million at the 2023 peak to just 300,000–350,000 now.

“That’s a massive change,” Zandi said, and one he believes is “significantly lifting the cost” in sectors that rely heavily on immigrant labor: construction, agriculture, manufacturing, transportation, distribution, hospitality, retail, elder care, child care, and other personal services.

Fresh and dry vegetable prices, for instance, surged almost 40% in the latest PPI. While tariffs and weather also factor in, Zandi says immigration restrictions are a major culprit.

“You can see it in meat prices, agriculture, food processing, haircuts, dry cleaning,” he said. “The fingerprints of the restrictive immigration policy are all over the CPI and PPI numbers we got this week.”

If Zandi’s diagnosis is right, he says the Federal Reserve can hold rates steady without worrying about a cascade of layoffs because the weakness in hiring stems from fewer available workers, rather than collapsing demand.

The other camp, however, sees a different story: a genuine slowdown in labor demand as businesses pull back amid economic uncertainty. They point to sectors like manufacturing, transportation, and warehousing, where payrolls have been shrinking for months, and to surveys showing declining job openings. In that scenario, Trump’s policies may be a factor “at the margins,” Zandi said, but the main driver is waning business confidence and softer consumer demand.

Fed policy caught in the middle

The distinction matters for monetary policy. A true drop in labor demand would usually ease wage pressures and inflation, giving the Fed room to cut rates. But the latest inflation data, where both hiring slowed and prices rose, muddies the picture.

Zandi warned immigration-driven inflation is a supply-side shock — something interest-rate changes can’t easily fix. 

“Demand-side inflation has a different implication for monetary policy than supply-side inflation,” he said. “Rate cuts won’t bring more immigrants into the country.”

He also argues the inflationary effects of immigration restrictions will be more persistent than those of tariffs.

“Tariffs are more likely to be one-off,” Zandi said. “Restrictive immigration adds to shortages, higher labor costs and wages — and that can become self-reinforcing.”

Economists at Bank of America echo the stagflation risk and say it’s why they expect the Fed to avoid cutting rates this year. Markets so far have taken the latest data in stride, with the S&P 500 hovering near record highs on expectations of a September rate cut. But bond traders are starting to price in a slightly more hawkish Fed, pushing short-term Treasury yields a touch higher.

The path forward

Zandi believes easing immigration restrictions could quickly 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 said, noting immigrants’ outsized role in entrepreneurship and innovation.

Whether the White House acknowledges the link between deportations and inflation, Zandi wouldn’t speculate.

“Tariff inflation is not at the top of the list of reasons why they’re pursuing the restrictive immigration policy,” he said. “There are a lot of other motivations.”