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Friday, November 19, 2021
Problems with inflation and ‘wage spirals’
Shame on Stephanie Ruhle.
Just a few days ago, the MSNBC anchor inadvertently joined a Twitter shooting group by trying to explain how higher wages add to the inflation spectrum plaguing the U.S. economy.
Ruhle’s comment got a lot of attention on the site and came with a lot of mockery of her professional background as an ex-banker and her status as a (presumably) highly compensated TV anchor.
But – and with the danger of stepping into a Twitter firestorm himself – Ruhle was fundamentally right. Let me try to explain why.
It should be noted that in a society that has been polarized by class and rising inequality, it has become incredibly difficult to discuss the role that wages play in pushing up inflation. It is subdued by light accusations that those who try to make the argument somehow despise the working class – which we here at Morning Brief certainly do not. Meanwhile, the finer sides often disappear in the soundbite-driven world of social media and alleged cable TV.
Having said all that, it should be noted that our current problem of rising prices at its core is a matter of unusually high demand from the COVID era, driven by massive intervention by the Federal Reserve and Uncle Sam. That point was recently made by at least two Obama-era officials, Steve Rattner and Larry Summers.
For those who are not aware of it, consumer consumption and all the conspicuous consumption that comes with it make up as much as 70% of gross domestic product.
The reason it matters is that wages, as Morning Briefen has pointed out on several occasions, have risen quite markedly during the pandemic after a prolonged period of stagnation. Given the shortage of workers and the historically high number of people resigning, employers are more likely than not to raise wages even more. On its face, this is a good thing.
But in a nutshell, behavioral economics tells us that the more money people have, the more they will spend. And as I pointed out in Thursday’s edition, there is plenty of evidence to suggest that free-of-charge workers are loading up on revolving credit.
This, of course, stimulates demand in an economy driven primarily by the consumer – thus inflaming the inflationary problem best summed up by Rattner as “too much money chasing too few goods.”
Most sensible people rightly welcome the idea that the middle and working class make more money. Yet the rapid pace of (long-awaited) wage increases stimulates both demand and prices, creating shortages almost everywhere.
Pointing to the Atlanta Fed’s wage growth track, which showed two consecutive months of growth above 4%, veteran Wall Street observer Peter Boockvar noted this week that these polls “are the two highest … since 2008 and in 1. quarter this year, they averaged 3.4% and in the 2nd quarter it was 3.1%. “
Meanwhile, a National Federation of Independent Businesses study – the voice of the small business sector, which accounts for at least 40% of economic activity – reported that the compensation hit the highest in nearly 40 years, Boockvar pointed out. Net 44% of NFIB respondents said they increased pay, and 32% plan to do so in the next few months.
“The trend is clear with wages and labor,” the analyst added.
Taken together, these factors contribute to what Tom Tzitzouris, head of interest rate research at Strategas, openly stated recently was a “wage-price spiral” that increased supply and labor backlogs.
“It tells us that people who work for their livelihoods – high incomes or low incomes – think they have pricing power. And once they believe that, inflation has the right legs,” the analyst warned.
“It does not mean that we will see an acceleration in inflation, it just means that this inflation will be sticky – potentially 3% + [in headline consumer prices] for the next decade or at least for the rest of this business cycle, ”added Tzitzouris.
“As long as wages rise in the direction of where inflation is, it tells us that the wage-price spiral is still in effect,” he said.
By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek
What to see today
Officials in the Biden administration will travel across the country today to present the new infrastructure law and argue for the next item on the Biden agenda: the Build Back Better Act. Vice President Kamala Harris and Minister of Labor Marty Walsh will be in Ohio, Transport Secretary Pete Buttigieg will be in Arizona, and EPA Administrator Michael Regan will be in Texas.
While the financial world is looking for any tips on President Joe Bidens election to head the Federal Reserve – with news expected every day – the president has a light public schedule, including pardon of National Thanksgiving Turkey in print at. 15:15 ET. Then he goes to Delaware for the weekend at. 18.20 ET.
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