Are Rising Wages Due to Inflation, or Worker Shortage?
A recent CNBC article positioned rising wages as a ‘silver lining’ of inflation. While the piece was quickly edited after a strong backlash on twitter, an honest look at inflation will reveal some benefits, in certain context. An examination of the economy’s current context suggests a worker shortage is also a factor in rising wages, which could mean the full effect of inflation has yet to be seen.
The Fed’s Critical Role in the Economy
Since the 1990s, most central banks, including the Federal Reserve, have committed to maintaining inflation at a 2% rate. In Q1 2021, Fed Chair Jerome Powell reiterated this policy on multiple occasions, which had been welcomed by Bitcoin holders.
Usually, the Fed engages in the following balancing act:
- If inflation is high, raise interest rates
- If economic growth is low, decrease interest rates
Last year’s lockdowns put a giant wrench into this well-oiled monetary mechanism. This was first manifested by the so-called Black Monday on March 16th when the global equity markets plunged by 13%, and the S&P 500 blue-chip stock index lost over 30% of its value within a month.
The Fed came in as the savior with the creation of its first-ever credit facilities – PMCCF and SMCCF – through the CARES Act. This signaled to the stock market that the Fed had its back with its influential money supply machine. However, lockdowns on such a global scale have never been done before, and that which is new tends to create unpredictable consequences. We are seeing them now.
Economic Growth vs. Inflation
At the beginning of June, Treasury Secretary and the former Fed Chair Janet Yellen told reporters at the G7 summit that the soaring inflation rate from May at 5% is “transitory”, despite more than doubling from previous forecasts. Moreover, she said that we should expect to see an elevated 3% year-over-year inflation rate only until the end of this year.
More data is coming in that weakens both Yellen’s and the current Fed Chair Powell’s forecasts. May’s 5% increased to June’s 5.4% annual inflation rate, well above the 4.9% forecast. This represents the highest rate we’ve seen since August 2008.
According to U.S. Bureau of Labor Statistics, the full brunt is felt within these sectors:
- Used cars and trucks (45.2%)
- Gasoline (45.1%)
- Fuel oil (44.5)
- Utility gas service (15.6%)
- Transportation services (10.4%)
Of course, these cost increases are then transferred to consumers, having the effect of once again raising the CPI (consumer price index) from May to June by 0.9%, to 5.4%. On the centennial timeline, this means that you need many more dollars to maintain the same quality of life.
At the same time, if inflation doesn’t extend into hyperinflation – which never yields a good outcome – inflation does have some perks. It not only tends to correlate with economic growth but it alleviates recessions. Moreover, inflation can lead to wage adjustment if it remains ahead of the rising costs of living.
Economic Growth vs. Worker Shortages and Supply Chain Disruptions
This month, it is becoming apparent that the high inflation rate is here to stay for longer than anticipated. This was confirmed a couple of days ago by a Wall Street Journal survey among economists. According to their updated forecasts, annual inflation will remain over 3% by the end of 2021, but should recede to the ~2.3% level during 2022 and 2023. Joel Naroff, chief economist at Naroff Economics LLC, summed up the forecast as:
“We are transitioning to a higher period of inflation and interest rates than we’ve had over the last 20 years.”
With the “transitory inflation” narrative behind us, CNBC caused quite a stir recently on social media for claiming that “inflation’s silver-lining is higher salaries”. One of many responses noted the obvious – inflation drains your wealth, if your wealth is entirely in USD.
As previously noted, inflation may signal a healthy economy, and it may even signal higher productivity and higher wages. However, on the spectrum between that scenario and hyperinflation, we have to take a look at the current context of inflation:
- Historic money supply increase
- Historic Fed interventions
- Historic supply chain disruptions
- Historic shift in consumer and worker habits
- Highest rate since the Financial Crisis of 2008
In this context, the possibility for increased wages not to simply sink into higher living costs seems negligible. Then, there is another problem for economic recovery – global worker shortage. From truck drivers and factory workers to personnel in the service and hospitality industry, it seems that lockdowns have shocked the economy for far beyond the short-term future.
In the retail sector alone, 4 million workers quit their jobs in April according to the Labor Department, triggering sporadic supply chain disruptions. While it is easy to blame this on unemployment benefits and other relief packages, this is an acceleration of an existing trend – a shrinking of the working age population since 2018.
Bolstered by the Chamber of Commerce’s “The America Works Report” from June 1st, this trajectory leads to 1.4 workers per job availability compared to 4 per job in 2012.
In other words, economic growth may not pan out as planned. Either automation will have to be drastically ramped up to meet the consumer demand, or companies will have to significantly increase wages and add more perks. Therefore, instead of counting on inflation to readjust wages, labor shortage seems to be the driving force to make it happen.
In the end, even that may not outpace the inflation rate. If it continues to increase, it may force the Fed’s hand to raise interest rates. The last time that happened, in December 2018, the stock market crashed. Since then, the Fed has propped up the market even more.
With the dollar shrinking in value, do you think more pension funds will take advantage of Bitcoin in the future? Let us know in the comments below.