America’s two top concerns are in direct opposition

It’s become abundantly clear that Americans have two big things on their minds this election year.

The first is the surge of immigration, largely the result of a rush of immigrants without legal status at the southern border.

The other is the lingering effects of post-pandemic inflation, which sharply, and permanently, raised the cost of living especially for key items like food and housing.

To be clear, polling around immigration suggests the uptick in concern — or as political scientists call it, salience of immigration as an issue — is largely driven by from Republicans worried about issues such as immigrants committing crimes, and uncomfortable with chaotic scenes on the border. But, I feel pretty comfortable making the leap that “concern,” in this instance, means a significant group of Americans want less immigration.

At the same time, Americans clearly want lower prices. That’s not going to happen, absent a serious spike in unemployment and widespread deflation. But barring that, they want inflation — that is, the rate that prices are rising — to slow.

Here’s the thing. Economically speaking, this is akin to pollsters finding finding that Americans’ top concerns are 1.) ensuring the constant unfettered security of their own personal, pristine piece of cake, and 2.) absolute freedom to devour that beautiful piece of cake whenever and wherever they want. (Don’t tread on me! Don’t tread on my cake!)

That’s because the sharp influx of immigrants, and more specifically the surge in off-the-books immigration, seems to be a reason why inflation, as measured by the Fed’s key gauge has slowed sharply, dropping from 7.1% in mid-2022, to a — still too fast! — 2.7%.

A note out from this week from Goldman Sachs analysts, who have been doing some of the most interesting thinking on this topic, level sets by saying the textbook answer to how immigration affects inflation is, well, it’s something of a wash.

That’s because while immigrants can increase the supply of labor — putting downward pressure on wages —they also increase the demand side of the economy, putting upward pressure on the cost of housing, etc. But, Goldman analysts say, “we think the textbook logic is not the full story in the current case.”

There are a few reasons why. The first is the size of the sudden boom in immigration, and the fact that it came when the job market was incredibly hot. The second is the fact that a majority of the people who arrived found work in very same low-wage sectors — like food service and hotel work — where wage and inflation pressures were the highest “contributing to labor supply in places where it was most badly needed.”

And while these people do add to the population, and put upward pressure on things like housing demand, they also tend to save more of their money than typical American households, in order to send checks back to their home country. “So, they likely contribute more to US supply than to US demand,” Goldman Sachs wrote.

Now, it should be said, that Goldman’s own attempt to estimate the impact of immigration on inflation — using state and local data — produced results that are pretty consistent with the textbook story. That is, immigrants, seemed to lower the prices of some things and raise the prices of things like rental housing.

This wrinkle about housing matters. Housing costs is a huge weight in the CPI inflation calculation, but it’s less important in the inflation metric that the Federal Reserve sees as its key target, known as PCE inflation. And because PCE is less-housing focused, it likely means that immigration has likely played a larger role in pushing this key inflation metric lower.

Of course, none of this is going to change anybody’s mind about immigration. Nor should it, necessarily. But it does mean that whatever happens on the border could could reverberate in inflation data and Fed decisions, which we’ve noticed, are kind of a big deal for the stock market.