Will Raises And Bonuses Be Inflationary? Maybe Not- By NEIL SISKIND

Remember that raises are not tax cuts. Raises and bonuses are monies transferred from businesses to individuals. So consumers have more money- but businesses have less. Some businesses have simply decided that instead of keeping X dollars of revenues, they will allow employees to have X dollars of revenues. This is different than if businesses paid employees exactly the same amounts of money and then the government took less from the employee in the form of a tax cut. In such case, both businesses “and” employees would have more money to spend. A raise in salary or a bonus is a net transfer of wealth from one “spender” to another “spender”. In fact, some would argue that a dollar spent by the consumer has less of a multiplicative value to the economy than if that same dollar was spent by a business (in cap-ex or what have you). So, in this regard, raises and bonuses may actually be less inflationary than if a respective business kept and spent that dollar. They may actually be “deflationary” in that they take away money that a company could have invested to create jobs through cap-ex (causing increases in labor demand, wages, and commodity prices) and puts those monies in less inflationary hands. Again, if there were a tax cut to employees by the government rather than a bonus or raise to employees from businesses, there would be more potential for inflation where it’s clear that a dollar spent by a consumer is more stimulative to the economy than a dollar taken and spent (read: wasted) by the government.

In any event, regardless of the source of more monies to employees, consumer spending may not lead to PPI and CPI inflation where structural issues in the economy, including Amazon, are forcing downward pricing pressures on businesses in order to compete. Companies lacking pricing power will not, necessarily, get pricing power just because consumers have more money in their paychecks; and consumers may just spend more money in the same ways they have been- more Amazon, more TJMaxx, more Apple, more Netflix.

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endnote

Whether tax cuts that directly benefit consumers have an effect on inflation is outside the scope of this article.

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