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There is one hot topic that could hold the key to the fate of inflation. It’s immigration.
Despite the latest data showing that inflation rose more than expected in December, experts say it has already made significant progress in bringing consumer price growth down to current levels. points out. Investors would be wise to track immigration flows when assessing interest rates and the future direction of the U.S. economy.
Not only did the U.S. foreign-born population finally exceed pre-pandemic trends in December, but the labor force participation rate for that group also rose significantly above pre-2020 levels over the past 15 months.
As a result, the arrival of these workers eased labor shortages during the pandemic and curbed wage increases that fueled runaway inflation.
However, recent trends may not continue in the future. It depends on both global and domestic policy, and immigration could be a key issue in an election year.
“It’s a political topic, but there’s no question about it,” Samantha LaDuc, founder of LaDuc Capital LLC, told Yahoo Finance. “Immigration definitely helped keep inflation in check, keeping it from getting out of control.”
The opposite is often true. Prices may rise due to entry restrictions.
Consider, for example, when immigration was held up due to the pandemic. In 2020, then-President Donald Trump suspended both immigrant and nonimmigrant visas, then extended the suspension until President Joe Biden took office. At the same time, China closed its borders to domestic and international travel in response to the pandemic.
what happened? The share of foreign-born workers in the employed population and the total labor force declined and did not recover to pre-pandemic February 2020 levels until the final months of 2021.
Overall, the U.S. economy lost about 1 million workers from March 2020 to December 2021, many of them foreign-born, according to MacroPolicy Perspectives economist Courtney Shupert. As a result, companies have had to compensate for the shrinking number of workers by raising wages, especially for those in the lower ranks.
“So if you’re in an environment where wage growth accelerates from 3% to…8% a year, that suddenly becomes a huge burden on the bottom line, so there are some alternatives to limit that.” Gregory Daco says. EY Parthenon chief economist told Yahoo Finance.
Some companies chose to pass the costs on to consumers by raising prices, Daco added, setting the stage for higher inflation in the future.
Of course, there is a time lag between the decline in migrant workers and its eventual impact on inflation, with inflation reaching its most recent peak in June 2022 and slowly easing thereafter. Wage growth followed a similar path.
By that time, the influx of migrant workers was already increasing. After taking office in 2021, Biden implemented more than 400 executive actions to streamline the visa process and, more importantly, added staffing to government agencies needed to process visa applications, according to Schupert. It is said that he did.
“That was something we didn’t have,” Schupert said.
According to data provided by MacroPolicy Perspectives, work-eligible visa issuances began in 2022 to exceed the monthly average from 2017 to 2019 and have remained above trend since then.
Another important factor is that China fully reopened its borders in January 2023. Schupert said last year’s visa data showed an increase in immigration from China.
According to the data provided, by December 2023, employment levels for foreign-born workers will have increased by nearly 10% compared to pre-pandemic levels, and foreign-born workers will make up just over 20% of the workforce compared to 2007. This is the highest level since then. Macro policy perspective. Schupert said the economy has recovered by 60% from a shortage of 1 million workers.
“By hiring more workers, we were able to avoid a wage-price spiral,” Schupert said. “There’s a theory that when inflation goes up, wages go up, and then inflation goes up again… and the two are mutually reinforcing. We haven’t gotten into that idea yet. I think the resiliency of having more immigrants in part is helping.”
The impact of immigration on wages is certainly complex, said Dean Baker, senior economist at the Center for Economic Policy Research. He said the influx of foreign-born workers would put downward pressure on wages in 2022-23, but it would not always work that way.
“Research results are mixed,” he wrote on Yahoo Finance.
How immigration continues to affect inflation in the future depends on a variety of factors. For example, immigration does not necessarily lead to more workers.
Immigrant labor force participation is high, accounting for about half of the overall increase in labor force participation last year, Spaert said, but that share declines as more elderly relatives and non-labor immigrants stay home. there’s a possibility that. Mother and student come to the United States.
“That would be kind of a downside risk,” Darko said, noting that he expects participation rates to continue to rise based on recent trends.
The actions of other countries could also drive future migration trends, as China did during the pandemic. Another example Dako cited is that if Canada loosens its immigration policies for certain types of workers — “which it often does” to manage labor shortages, Dako said. In that case, some immigrants would leave the United States.
Next is domestic policy regarding immigration. Far-right Republicans are demanding that border security be included in government funding negotiations, while Trump, the front-runner for the Republican presidential nomination, has revived the anti-immigrant rhetoric that was a centerpiece of his 2016 campaign. Ta.
“If Trump returns to power, we already know the strategy. He’s already implemented this. We know immigration will drop again and inflation will rise,” Raduc said. .
“We don’t know what immigration policy will be like, but it will definitely have a big impact on the direction of inflation.”
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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