Transitory Inflation Does Not Mean Transitory Price and Wage Increases- by NEIL SISKIND

“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.

Inflation? Only One Word Matters – “Offshoring”

Offshoring of costs allows for low inflation.

Where input costs are low, prices are low, cost of living stays low, wages stay low, inflation stays low, & interest rates stay low.

The low cost of capital & the need to keep prices low b/c wages are low leads businesses to seek scale & economies of scale to achieve more profits through more revenues, in lieu of fatter margins. And ,then, even more offshoring is used to keep input costs low & maintain margins.

Americans may be underestimating the onshoring impulses coming to prices.

Actual onshoring:  

We are in the process of reversing some onshoring of critical products & tech manufacturing. This requires the building of facilities (commodities), domestic construction labor (labor supply), & then long term employees (higher input costs). It’s inflationary. 

De facto onshoring: 

There is also a de facto onshoring taking place through govt. manufacturing (i.e., building) things domestically (infrastructure plan). Domestic labor & metal and concrete costs can’t be offshored or lowered w/ economies of scale. It’s inflationary.

In the former case above, input costs rise for consumer goods. In the latter case above, consumers don’t buy the bridge that the govt., manufactured- but the govt. pays higher wages & input commodities’ prices rise, & even China can’t make that go lower. Govt. commodity demand will raise prices for other businesses. Plus, the govt. will not only hire U-3 & U-6 people for infrastructure projects. It will need employees w/ skills from all across the skills spectrum- including presently employed people.

Even w/ trillions in fiscal and zero rates, we’d still need higher unit costs- higher input costs- to get inflation. Stimuli can be “dis”inflationary w/o higher input costs. When we maintain low input costs we get low inflation. Low rates can even “cause” this by encouraging scale and inducing overcapacity. 

When input costs go up, we get higher PPI inflation and can get CPE inflation- or stagflation, depending on the impulse.

Offshoring vs. onshoring (including de facto onshoring), singularly, determines if we have more inflation, or less.

Don’t You Turn My Red State Blue (to the tune of Crystal Gayle’s “Don’t You Turn My Brown Eyes Blue”)

Don’t know how we got so Blue
Don’t know what’s come over you
You want someplace new, but
don’t you turn my red state blue

We’ll be fine when you’re gone
You can’t stay and vote wrong
That simply won’t do
Don’t you turn my red state blue

Keeping your secrets, telling bad lies
If you leave your own city, don’t bring us your crime
If you’ve learned a good lesson, you can stay here and try
If you vote for losers, then it’s goodbye

You’ve treated us oh so bad
Then your own state got so sad
So you’ve run to us now, it’s true
But don’t you turn my red state
Don’t you turn my red state
Don’t you turn my red state blue

Don’t you turn my red state
Don’t you turn my red state
Don’t you turn my red state blue

Don’t you turn my red state
Don’t you turn my red state
Don’t you turn my red state blue

A Quick Clarification on Inflation

There’s lots of talk about wages “causing” inflation.

Hire input costs cause (PPI) inflation. When passed on to consumers, it’s PCE/CPI inflation.

Higher costs & higher living costs cause wage hikes- “not the other way around”.

Offshored costs keep prices & living costs low & wages stagnant, as jobs are dislocated. Low rates & scale enhance the disinflation impulse.

When input costs rise, PPI increases can mean CPI/PCE inflation. It’s true that higher wages are needed to sustain inflation & to prevent demand destruction.  

It’s hard to get unemployment so low that wages rise as a result. Look @ 2019. Low unemployment didn’t cause higher wages so much as it caused skills shortages. Prices didn’t rise- so, wages didn’t rise.

Wage pressures, today, are from frictions, & likely, transitory (though if it lasts too long, it’s hard to reduce wages).

Trying to use wages to “cause” inflation could cause asset bubbles, pricey houses from low rates, a weaker currency, &, thus lower “real” wages for all, & financial instability. The monetary impulse can be disinflationary. Good inflation comes from high demand, then higher costs & wages, not tight supplies from low rates or supply shocks.

This is just a general overview to explain that wages are a “result” of inflation & “sustain” inflation- but aren’t the prime cause or initial impulse for inflation.

Inflation Expectations – By NEIL SISKIND

I’m not so sure the Fed wants the economy to run hot. I think it wants people to think it wants the economy to run hot b/c how will the Fed get inflation higher w/o higher inflation expectations?

The Fed knows we have a structural problem here (w/o infrastructure). It’s a mind game.

The question becomes, if the expectations lead to inflation higher, then does the Fed keep it’s word on running hot. What would the Fed do? And that is why Secretary Yellen (and Chairman Powell) dismiss this question and say- “Oh, we can fix it if it’s too hot. We have the tools”.

What they may mean is that they can’t easily remove inflation … BUT they can more easily tamp down inflation expectations with new rhetoric.

Neil-Siskind-lawyer-picture

The Fed is Probably Right on the “Transitory” Nature of Inflation- But Timing is Everything, by NEIL S. SISKIND

“Transitory”- the magic word of the moment for the economy. It’s even more magical than the word “inflation” b/c it defines & qualifies the inflation.

The Fed has been warning us about “transitory” inflation- due to base effects, pent-up demand, & supply chain constraints- for months.

Now that we are beginning to see inflation materialize, some equities investors are worried (and the bond market can’t decide how it feels).

But this inflation we’re about to see, should, in fact, be transitory … at least until an infrastructure bill is presented to the House for a vote.

If, during the (alleged) “transitory” period of inflation, a two-trillion dollar (or so) infrastructure law looks more & more likely to be passed in Congress or forced-through in reconciliation, “transitory” inflation could run, head-on, into “sustainable” impulses (even the social programs that comprise a large part of the present plan will mean new buildings and build-outs that require metals, lumber, and concrete, communications infrastructure, oil and gas, construction workers, and, of course, full-time employees to administer and oversee the programs; such programs, themselves, will require physical infrastructure in which to operate.)

Some investors and market observers posit that the long-term nature of an infrastructure plan, where the spending would be spread-out over 8-10 years, would make it less inflationary. But once government contracts are won pursuant to RFPs and bids, purchases of materials & staffing initiatives by contractors would ramp-up fast so that resources are in place & costs are minimized (and profits on contracts are maximized). No contractor would wait to obtain necessary copper or labor until just before needed. These needs would be pursued immediately, either by taking possession or by locking-in contracts (in the case of commodities). And keep in mind the multiplier effects this would have on the economy, how public investment spurs private investment, the high minimum wage levels that would be in federal contracts, and the requirements for contractors to buy supplies and services from U.S. companies. Plus, the labor skills needed by the government and its contractors will be the same as those needed by private industry, creating competition. It wouldn’t be only U-3 and U-6 people that the government would need; it’d be employees from all across the skills spectrum- even those already employed. Finally, when has a government project not had cost overruns and not had projects go on longer than initially planned? The labor and material needs would likely continue for longer than scheduled and cost more money than originally budgeted.

It’s worth noting that there are wage pressures already materializing today, but they are, likely, due to post-pandemic frictions and due to fiscal stimuli creating work disincentives, and will prove to be transitory as labor supply-demand dynamics correct. Though, if these allegedly “transitory” conditions continue for long enough, higher wages can become structural, since once higher wages are paid, it’s difficult, or impossible, to reduce them.

The Fed may be right about the coming inflation being “transitory”- resulting from base effects and supply constraints. But if the period defined as “transitory” runs into a time where an infrastructure law looks likely to be passed, then supply & demand dynamics from base effects and supply constraints that should dissipate, could transition, quickly, from mere post-pandemic impulses to more persistent pressures as demand materializes for commodities & labor from the long-term fiscal impulse, or, at least, from the inflation expectations that develop in anticipation of that impulse. These pressures would be on top of an already improved economy, more onshoring and onshore manufacturing investments (requiring commodities to build manufacturing facilities, labor to build the facilities, and long-term labor for business operations), and expanding ESG policies and practices. Further, it isn’t only the government’s commodities and supplies demands that push costs higher- the continuing needs of private industry would follow-on those government and government contractor purchases to create an upwards input-cost spiral.

Even if “transitory” inflation impulses fade, we may never experience any price alleviations if structural impulses grab the inflation baton and run with it.

_ _ _ _

About the Writer

Neil Siskind is: President of The Siskind Law Firm, focusing on business transactions, real estate, product investments, trademark licensing, and product distribution; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 9 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind accurately predicted the February, 2018 stock crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. All the stock indices are down approximately 6% for 2018. In his September 26, 2018 article, Lots of “Bull” In The Bull Market: Let’s Look At What’s “Really” Growing, Neil Siskind explained that, despite Wall Street’s bullishness, the economic data and stock market underpinnings were in decline, and the economy and stocks were at imminent risk. By the closing of markets on October 23, 2018, the S&P 500 had fallen approximately 7%, with October being the S&P’s worst month since August 2015 (and December being the S&P’s worst month ever), the Nasdaq continues to have its worst month since 2016, and is down approximately 8% from article publication, and the DJIA is having its worst monthly performance since 2008. In 2018, Neil Siskind coined the phrase “synchronized global slowth™” (or “synchronous slowth™”) to describe the occurrence or condition of multiple emerging market and developed market economies commencing a downward trajectory of economic and GDP growth, or actually contracting to a point of slow, stagnant, or negative economic and GDP growth, simultaneously. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

Other Recent Articles by Neil S. Siskind:

Infrastructure Trumps U-6 and Low NAIRU by NEIL SISKIND

Infrastructure vs. U-6 & a Low NAIRU

The Fed is determined to assert 1 leg of its “trinary-mandate”, max. employment, while, likely, compromising the other 2 legs- price & financial stability- expecting labor slack, per U-6, & low NAIRU, to prevent high inflation.

Just because we won’t have wage inflation doesn’t mean we won’t have inflation.

We only need inflation to have inflation.

Usually, higher prices “precede” wage hikes. Higher wages are usually an “effect”, & not the “cause” of higher prices.

W/ hundreds of billions in “true” infrastructure, govt. would need things businesses & consumers need, too- copper, lumber, gas.

Sec. Yellen has 2022 near full-employment. This, plus onshoring & infrastructure = lots of demand effecting global materials/input costs. This could raise PCE inflation, even at no higher than full employment.

With government as a huge buyer of materials, inflating global prices, w/ higher costs & prices for businesses & consumers, the Fed lowering interest rates based on U-6 and low NAIRU is a separate matter from rising cost inputs due to fiscal spending directly on input materials. Resulting cost inflation could lead to higher wages and an inflation spiral, regardless of U-6, resulting in a higher-than-expected NAIRU. 2019’s 3.5% unemployment would’ve had a lot more inflation w/ the govt. buying tons of metals, concrete, & oil.

And I don’t know of any Fed “tool” that’s been able to stop federal govt. spending.

An infrastructure law will require government agencies and government contractors to buy materials and supplies from domestic companies, where possible (i.e. legislated higher prices). Moreover, government contractors will be required to meet or exceed a minimum labor wage to obtain and keep contracts- which also means that private employers will have to pay those minimum wages to compete for labor (i.e. legislated higher wages).

Also, government spending will have multiplier effects. And public investment spurs private investment- which, along with onshoring, will require more domestic labor.

Onshoring- Infrastructure- Fed Labor Policy: The Axis of Inflation?

There’s an incorrect idea among some that we need wage inflation to have inflation. We only need inflation to have inflation. And we need price inflation to have wage inflation. (We “can” have wage inflation as the initial inflation impulse- but it’s not required, or usual.)

The Fed may be fully focused on the cost side issues, after all- and is expecting exactly the inflation it’s been looking for.