Why wages hold the key to inflation’s long-term persistence

AGF Investments CEO examines pieces of inflation puzzle and how struggles in U.S. hiring could have far-reaching implications

Why wages hold the key to inflation’s long-term persistence

The recent news of record-high inflation in the U.S. – government figures showed it hitting a 13-year high of 5% in June – has undoubtedly shaken many investors, and added to fears that the recent accommodative climate of stimulus has heralded a new era of higher prices not seen in decades.

But according to AGF Investments CEO and CIO Kevin McCreadie, that long-term outlook rests on many ifs, the most significant of which involves jobs.

In a recent commentary, McCreadie cited the nearer-term ebbs and flows that could shape the trajectory of prices, which will be “largely conditional on how supply and demand dynamics for many goods and services– including labour –end up playing out over time.”

While prices of commodities like lumber and copper have surged amid rising demand and unprecedented shortages during the pandemic, he said high prices in markets may eventually bring about low prices as they induce producers and extractors to ramp up their activities. An increase in supply, he added, may create an unfavourable environment if it coincides with plateauing or waning demand as the economy slows from its current pace.

“[I]nvestors may not be so worried about inflation as they are disinflation – whereby prices continue to increase but at a slower pace –or deflation in the case that prices actually begin to drop from current levels,” McCreadie said. “Indeed, lumber prices have already begun to retrace some of their meteoric rise of earlier this year and it’s precisely this scenario that the U.S. Federal Reserve is alluding to when it talks about the transitory nature of inflation these days.”

The well-reported struggles of U.S. employers to hire employees amid the recovery, he added, may well prove to be a major driver of inflation in the longer term. While consumers have come back in force, workers have been slower to come back to businesses that are once again opening their doors; some have been sustained well enough by stimulus cheques and unemployment insurance, while others struggle to find a good job fit due to medical conditions, caregiving duties, and other external impediments.

“Either way, it’s become clear in recent weeks that one of the ways to make current job openings more enticing is to offer more pay for an equivalent amount of work than was the case in the past,” McCreadie said.

Unlike rising commodity prices, he argued, upward movements in wages tend to be a more sustained driver of inflation. While the prices of commodities are expected to ebb and flow, a hike in someone’s salary – as distinguished from a one-time bonus – tends to set a new standard of income for that job that sticks and could impact salaries for other related types of employment.

“[I]t’s important that investors bear that in mind,” he said. “Not only because it likely holds the key to whether inflationary pressures persist more broadly, but also because it could lead to a period of stagflation if incomes continue to climb in the context of a slower pace of growth for the global economy.”


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