Even if wages increase, inflation will not necessarily follow

While it is certainly possible for workers with cash to push up the prices of goods and services if consumer demand consistently exceeds what companies can produce, there are two reasons why investors should be wary of bet on a prolonged period of uncontrollable inflation.

First, despite a few anecdotes here and there, workers’ compensation is not increasing at a faster rate than before the pandemic.

The average American employee earned about $ 30.33 per hour, up from $ 28.51 before the pandemic. This is an annualized growth rate of 5.1%, compared to an average prepandemic growth rate of 3% per year. But the increase is not due to the fact that workers got big increases. While some did, the bigger explanation is that most of the people who lost their jobs weren’t paid much initially. This automatically increased the reported average salary of anyone still employed, even though most individual workers were no better off.

Just look at the salary growth tracker released by the Federal Reserve Bank of Atlanta, which examines individual variations in wages from a large sample of workers. The median change in wages tends to follow the share of workers aged 25 to 54 with a job, although the pace of wage increases has consistently been around 3% to 4% since the start of 2015. From the start of 2015 By the end of 2018 until the pandemic hit, wages had increased at the faster end of that range. Since then, wage growth has slowed to just over 3%.

There is also the cost of employment index, published by the Bureau of Labor Statistics, which takes into account changes in the composition of workers as well as changes in benefits and premiums paid. This pay measure has only grown 2.6% in the past 12 months, a little slower than before the pandemic and significantly slower than in the years before the financial crisis. Business labor costs could increase significantly in the future, but they haven’t yet.

Second, even if workers’ compensation accelerates in the future, the link between wages and prices is too weak to be a reliable harbinger of faster inflation.

For one thing, the mix of things Americans buy is different from the mix of industries in which they work and earn money. About one in seven consumer dollars is spent on groceries or foodservice, but less than one in 20 dollars earned in employee compensation goes to people who work in agriculture, food manufacturing, grocery stores and restaurants. Less than 7% of the United States’ payroll and benefits go to construction and real estate workers, but more than 16% of spending goes to housing. Meanwhile, a large portion of total U.S. employment income comes from industries that are not consumer oriented at all, such as government, law, investment banking, B2B software development, advertising and management consulting.

More generally, while labor is the most important cost to the economy as a whole, wages are only an expense for many individual businesses alongside rent, capital goods, raw materials, components, professional services and electricity. When companies reduce these other costs through efficiency improvements and productivity growth, they gain space to pay their workers more without having to raise prices. Thus wage growth accelerated throughout the 1990s even as inflation slowed.

The flip side is that price spikes can occur even when wages are stable if companies feel pressured to pass higher input costs on to consumers. Car rental companies do not have increase their prices by 62% since last February because they lacked manpower, but because they had liquidated their fleets in the spring and were not prepared for the recovery in demand. These same companies also desperately bid on used vehicles at auction, raise inflation exceeding the wage gains of most workers.

Then there is the flexibility of profit margins. Companies that fear to retain their workers may eat into their income if they lack pricing power, while companies with a dominant position in the market may increase costs for consumers without passing the gains on to their workers. The bargaining power of labor is not constant over time or across sectors, further weakening the link between wages and prices.

The acceleration of wages could lead to faster inflation, and it is if the increase in incomes leads to a sustained increase in consumer demand that causes companies to raise prices. Something like this started in the mid-1960s and lasted until the deep recession of the early 1980s crushed both wages and inflation.

The good news is that this is unlikely to happen again, in part because any increase in wage growth after the pandemic, if it does occur, will coincide with a sharp tightening in fiscal policy that is expected to limit the overall increase in power. consumer purchasing. There won’t be another round of $ 2,000 checks anytime soon, and enhanced unemployment benefits are expected to disappear nationwide in a few months.

the Hutchins Center in Brookings estimates that changes in government spending and taxes have boosted the growth rate of the US economy by six percentage points in the past four quarters. Fiscal policy is expected to subtract more than two percentage points each year in 2022 and 2023 when support is withdrawn.

Not surprising broker-dealers and other investment professionals are indifferent to the risk of excessive inflation over the next few years, a sentiment that is also evident in market price of inflation derivatives. Instead of worrying about accelerating wage growth, investors may want to focus on what could happen if worker compensation does not pick up in the years to come.

Write to Matthew C. Klein at [email protected]

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