Wage inflation is a major component of the inflation conversation and the Fed’s analyses and decision-making. Of course, housing related costs and PPI, CPI, PCE indexes are also major components. But, where wages remain muted, the Fed’s case for raising its target rate is tough to make, as it could hurt consumers while trying to bring down price pressures. If, on the other hand, prices are not really rising, but wages are, raising rates may not be so damaging to the overall economy. Rate hikes will just temper wages a bit so that businesses can afford labor. Further, if prices “and” wages are both rising, then higher rates can cool both down.
In any event, I have digressed a bit. The point of this article is that we have huge inflation- but it’s not in wages. It is also not in consumer prices. So how can the Fed raise its target rate?
We have enormous inflation in housing prices and enormous inflation in the size of companies.
As for the latter- businesses are getting larger and larger. Local retail stores have been supplanted by the Amazons and Wal-Marts of the world. Hardware stores across the country have been replaced by Home Depot and Lowes. Off-price retailers have been replaced by TJ Maxx and Ross. As all of the aforesaid grow, they gain pricing power due to scale and marketing muscle.
As businesses grow, and their respective competitors disappears, wages decline. It is like any other dynamic. Lack of competition creates pricing power.
Businesses are inflating- hurting competition, and hurting employees by keeping wages down, and keeping inflation numbers suppressed. The question is: What does it mean for us all and for society?
I’m sure I’ll explore this in later articles.