Inflation is not the worst thing in the world. In fact, onshoring and nationalism implies a business cycle:
More demand; GDP growth; higher prices; higher wages; inflation; higher interest rates; and then the slowdown (often with layoffs).
This is “good” inflation. It’s a good thing. It’s driven by jobs and private sector spending and natural laws of supply and demand. Low interest rates stimulate the supply side that starts the business cycle. People start businesses, buy equipment, and hire people; and those people go spend their salaries and prices rise, and then wages rise. It’s, properly, from demand.
It’s far better than offshoring, asset bubbles, asset crashes, lost jobs- even for those working in the asset space- stocks and real estate- and growing inequality as middle class jobs are sent to China and other places, leading to little inflation, lower growth, lower interest rates to encourage asset growth and a wealth effect and something that creates jobs (like construction), and speculation and yield hunting.
What we are seeing now is “bad” inflation:
Fiscal spending driven; shortage driven; incentives to not work driven, regulation driven, and higher input cost driven. Higher input costs should “follow” demand and then result in higher prices … not cause them. That’s when companies get into trouble, when the new costs make the new prices a necessity to survive. More demand- not less supply and more regulation (fossil fuel laws and minimum wages), and not govt. spending, and artificial shortages- should be the only thing that drives prices higher.
Input cost driven inflation also divides large and small businesses. Larger companies pay more for labor and absorb input costs. Small businesses can’t take the hit to margin and have to pass on the cost; and still may go out of business as customers flock to the lower cost provider- the larger company.
A labor supply crunch is forcing employers to pay higher wages. “No sweat”, says the Fed. “It’s transitory”.
But can wages even be transitory- or limited to just a few people?
Inflation can be transitory- but wage hikes are forever … and for everyone.
Higher wages beget higher wages because:
i. Once wages go higher, they don’t go lower;
ii. if one company raises wages to attract labor, its competitors will have to do the same. If Amazon offers more money, Walmart will have to offer more money;
iii. if future employees know about the new higher wages, they will want the same wage that those existing employees are being paid;
iv. if existing employees know about new employees’ wages, they will demand the same wage that new employees have been given- or else employers will create jealousy, resentment, and a mutiny by the crew.
Would it really be feasible for businesses, like restaurants and retail stores, to have a class of employees walking around, day-in and day-out, making more money that their associates handling the same duties and tasks?
For businesses and investors, the Fed’s explanation that the paying of higher wages will only be necessary for a transitory period of time and for only a limited number of people may be very comforting …
but it’s impossible.
As for inflation, it’s not as if higher prices are always bad- as long as there are higher wages to pay them (and as long as there is no inflation spiral). If a hamburger is 25 cents more, its okay, as long as you are making 25 cents more an hour. The problem is when you have cost-push (as opposed to demand-pull) inflation, from wages or commodities, leading the charge, you better be sure that the consumer accepts your higher prices- or else you get layoffs. This is true even if higher wages are the cost-push impulse. Consumers will still decide which products and services will get the extra dollars. Just because you pay higher wages does not mean that your company’s product or service is the kind that can command a higher price. This is why demand, not short supply, should, properly, always be the inflation impulse. Businesses should see consumer prices rise before they commit to higher input expenses.
All input costs are not the same. Thus, their effects are not the same. The ability to pass them on is not the same.
Outsourcing of costs is the reason for stagnant wages at home. Costs stay lower so wages don’t rise. Wages not rising means prices can’t rise (little inflation). This means more outsourcing to keep prices low (and more job losses) and means the need for more “scale” by using the cheap cost of capital from the low inflation. So costs hardly rise- so (and because) wages hardly rise. And ’round and ’round we go.
If commodity input costs rise, they can’t be passed on because there would be demand destruction from consumers who have stagnant wages.
If wages can rise than consumer prices can rise.
In general, costs and then prices should rise before wages rise. But wages “have to” rise soon after costs to prevent demand destruction. The good news in this scenario is that it should be lots of jobs that cause the demand that causes prices to rise. So, it’s demand driven. But if you must get that wage hike at the end of that cycle (this is all known as “the business cycle”).
Commodity, or other non-wage input costs, are hard to pass-on to consumers unless higher wages are expected to follow. This is why many companies absorb the higher input costs- they don’t expect wages to rise … and they don’t want wages to rise (they also know that if they raise their prices, their competitor may not, and they could lose market share).
If you raise wages “first”, the input cost is now one that allows consumers to afford higher prices. So this input cost can get passed on. And businesses will do that. It frees them up to do that. But there is- normally- no reason to do that unless other input costs are rising and they have to raise prices. So- again, costs and price increases should precede wage hikes.
If costs rise and wages don’t = demand destruction risk
If wages rise (which is, normally, only done due to higher costs and prices) = higher prices can be sustained
In our present scenario, if the labor shortage wanes, and then wage growth stops, and input-commodity costs rise, businesses will not be able to pass on the costs. This would lead to margin compression or layoffs.
Wage hikes can, and will, be passed on to consumers.
Higher costs, without wage hikes, by and large, would not be. And if they are, it is unsustainable.
The Fed has been clear that part #1 of its “trinary mandate” of 1. max. employment; 2. price stability; & 3. financial stability, will be prioritized, particularly over part #3, with part #2 achieved even as unemployment declines, due to labor slack (per U-6), and due to a lower NAIRU than thought b/c of that labor slack, & due to offshoring.
In 2019, we had scant wage inflation, even @ 3.5% unemployment. The Fed got persuaded that the NAIRU is lower than thought.
Now, at 6.1% unemployment, there may be wage pressures from shortages caused by unemployment benefits. Neel Kashkari said he “hopes” the low supply means higher wages, like for any other market-driven input cost.
If higher wages mean higher prices to pay those wages- that’s inflation; and probably not the transitory kind. Higher wages, once provided, are impossible to retract.
So, is the NAIRU higher than the Fed thought? With wage pressures at 6.1% unemployment, the answer could be “yes”. It may mean the NAIRU is “far” higher than thought.
This leaves us w/ 3 questions:
1. Will wages rise from this shortage?
2. Will this shortage persist?
3. Even if the shortage is temporary, will higher wages mean sticky higher prices?
Is the “old” NAIRU the “new-new” NAIRU?
Typically, jobs drive demand, demand drives costs & prices, prices drive wages. I actually think the NAIRU addresses “demand-driven” higher prices as unemployment declines, & then the wage impact to keep up w/ increases to the cost of living. In our case, today, the government has created an artificial market w/ a “de facto” cut-back on labor, causing the risk (or “hope”) of rising wages that can lead to higher prices. Thus, it’s not “demand” that would be driving higher consumer prices; it would be “wages” (cost push). But if it has the same net effect of higher consumer prices & higher wages, it, thus, would render a “lower NAIRU” theory that may occur in more organic circumstances irrelevant w/ respect to where inflation’s headed. The Fed may have no power to address such a scenario, as “demand” wouldn’t be the inflation impulse. Higher interest rates would do more harm where fiscal policy has artificially caused higher wages (a supply shock) & resulting inflation. It’s not so much a higher NAIRU that we’d get, necessarily, since it would be a manipulated “supply” impulse that causes the potential for higher inflation at a higher unemployment rate (so, the same outcome as a higher NAIRU).
Low taxes and the profit motive, in general, are not only to be taken at face value- i.e. to motivate work and growth and advancements … it goes much deeper.
Incentivizing work and individual opportunity, personal achievement, gives people structure for life- it keeps people from depression and from hanging-out and thinking unproductive harmful thoughts.
“Work” keeps the human mind busy- and to that end, we, as a nation and our founding fathers recognized that this requires motivating each person to obtain things for him or herself. Personal financial gain tempered by “law” for safety is the only answer to a sustainable society. It’s vital to keeping us all from killing each other.
The profit motive is a security motive. It keeps society together. It keeps people from gathering in factions to fight and kill each other.
This is why you see so many entertainers get on drugs- too much money too fast and no structure or “need” to work. Money goals are not just to have things. The money incentive helps keep the human mind focused, and purposeful, and active. the idle mind is the devil’s workshop.
Capitalism isn’t just about money. Not at all. That is naive.
Capitalism is about structure; security; psychology. It is the perfect balance between personal greed and safety. And low growth and high taxes threaten the whole balance. It threatens the ability for personal gain which threatens the incentive to “work”.
“Transitory” does not mean we will have prices that decline at some point. Higher prices can stick “and” the inflation can be transitory.
If prices rise- “once”- due to post pandemic factors such as pent up business and consumer demand and supply constraints, and those prices “stick” as they get passed on to consumers, it does not mean that we have structural or persistent inflation. It also does not mean that the higher prices are transitory.
The higher prices could persist, and we have to live with them, and they could cause higher wages. But this does not mean we will have year on year inflation again in a subsequent year. A round of higher prices and a round of higher wages could be the end of it. Prices could stabilize from there.
So, the higher prices may not be transitory- they may be permanent- but the rise in inflation can still be a transient phenomenon that does not repeat in the future. People keep wondering if these higher prices- like in lumber and food- will alleviate, noting that there must be inflation. Sure, there is inflation. And it could be permanent. Even if the prices don’t reverse, it can still be transitory inflation. The Fed would still be right.
Annual inflation rates and one-time price increases are different concepts. If offshoring continues, and if commodity and supply meets demand, that’s an equilibrium. Prices need not decline or rise from there.