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Friday, November 19, 2021
The trouble with inflation and 'wage spirals'
Pity Stephanie Ruhle.
Just days ago, the MSNBC anchor inadvertently stepped into a Twitter firing squad by trying to explain how higher wages are adding to the specter of inflation that’s haunting the U.S. economy.
Ruhle’s comment got lots of attention on the site, and came with plenty of sneering at her professional background as an ex-banker, and her status as a (presumably) highly compensated television anchor.
However — and at the risk of stepping into a Twitter firestorm myself — Ruhle was fundamentally correct. Let me attempt to explain why.
It should be noted outright that in a society that’s become polarized by class and surging inequality, it’s become incredibly difficult to discuss the role wages play in pushing up inflation. It gets subsumed by facile accusations that those trying to make the argument somehow disdain the working class — which those of us here at the Morning Brief certainly do not. Meanwhile, the finer points often get lost in the soundbite-driven world of social media and opinionated cable TV.
With all that being said, it should be noted that our current problem with soaring prices is, at its core, an issue of unusually high COVID-era demand stoked by massive intervention from the Federal Reserve and Uncle Sam. That point was recently articulated by at least two Obama-era officials, Steve Rattner and Larry Summers.
The reason why this matters is because wages, which the Morning Brief has pointed out on several occasions, have risen quite significantly during the pandemic after a prolonged period of stagnation. Given the worker shortage and historically high numbers of people quitting their jobs, employers are more likely than not to hike pay even further. 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, ample evidence suggests that free-spending workers are loading up on revolving credit.
That, of course, stimulates demand in an economy that’s powered mostly by the consumer — thus stoking the inflationary problem best summarized by Rattner as “too much money chasing too few goods.”
Most reasonable people rightly applaud the idea of middle and working classes making more money. Yet the rapid pace of (long overdue) wage hikes is stoking both demand and prices alike, and creating shortages just about everywhere.
Pointing to the Atlanta Fed’s wage growth tracker that showed two consecutive months of growth over 4%, veteran Wall Street watcher Peter Boockvar noted this week that those readings “are the two highest ... since 2008 and in Q1 this year it averaged 3.4% and in Q2 it was 3.1%.”
Meanwhile, a National Federation of Independent Businesses survey — the voice of the small business sector, which accounts for at least 40% of economic activity — reported that compensation hit its highest in nearly 40 years, Boockvar pointed out. A net 44% of NFIB respondents said they boosted pay, and 32% plan to do so in the next few months.
“The trend is clear with wages and worker leverage,” the analyst added.
Taken together, these factors are contributing to what Tom Tzitzouris, head of fixed income research at Strategas, stated candidly recently was a “wage-price spiral” adding to the supply and labor backlogs.
“That tells us that people who work for a living — high income or low income — believe they have pricing power. And once they believe that, then inflation has real legs,” the analyst warned.
“It doesn’t mean that we are going to see an acceleration in inflation, it just means that this inflation is going to be sticky — potentially 3%+ [in headline consumer prices] for the next decade or at least for the remainder of this business cycle,” Tzitzouris added.
“As long as wages are rising towards where inflation is, that tells us that the wage-price spiral is still in effect,” he said.
