"Cost Push" Inflation Is Not a Problem: Bring On The Wage Gains!

by: Toro

We have the Fed decision tomorrow, and with futures indicating that the Fed won't do anything until later in the year, it is a pretty safe bet that rates will remain unchanged.

However, wages are becoming a focal point for the Fed, especially now that productivity growth has slowed.

"The labor market has proved surprisingly tight in the face of what has been a decent slowing in growth,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, who predicts the Fed will raise interest rates by year-end. It's the "key issue in the inflation outlook.''

Minutes from the Fed's last Open Market Committee meeting cited the labor market as members' chief inflation concern, and economists expect a similar signal in the Fed's statement tomorrow.

This is wrong.

As I wrote a few weeks back, wage growth is not an imminent threat to inflation. During this decade, a "wage gap" has developed, in that gains accruing to labor have lagged economic growth. Rather, a disproportionate share of gains have accrued to capital in the form of corporate profits. Corporate profit margins are near or at multi-decade or all-time highs, while wages paid to labour relative to GDP are at multi-decade lows. Also, over the past decade, productivity gains have outstripped wage increases. Thus, there is a whole lot of room for wage gains before inflation becomes an issue.

Why? Because wage gains will almost certainly come out of corporate profits.

It is not the Fed's job to ensure that the holders of capital accrue a disproportionate share of economic gains. Nor is it the Fed's job to keep the stock market afloat at the expense of labor. As much as it benefits me as an investor, corporations do not have a God-given right to all-time high profit margins. Since profit margins are so high and companies are generally averse to raising prices throughout most of the economy, you will see profit margins fall before companies successfully increase prices. Plus, given that buybacks are off the charts, there is plenty of cash for companies to pay their workers.

So bring on the wage gains! We have years of potential out-sized gains to labor before "cost push" inflation becomes a problem.

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