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Can Wages Outpace Inflation?

CAMS Weekly View from the Corner – Week ending 6/23/2018

June 25, 2018

The citizenry’s experience relative to their wage and income growth rates over recent years (and even decades) has been low, in particular when simultaneously accounting for inflation.

This historical reality has left in its wake the on-going question of how markets generally can continue to escalate higher – while already highly valued when viewed through history – while citizens continue to experience low real income growth rates.  (Real income is the level of income growth after inflation is factored in.)

The Real Estate market in particular stands out in this observation.  This is in light of the tremendous price percentage growth rates relative to income growth rates in recent years.

With the on-going strength of the employment market we are embarking on a time whereby the supply/demand relationship is tighter within the employment market which can equal higher growth rates of wages in the near-future.

The bottom line is if we see higher wage growth rates while inflation simultaneously picks up at a higher rate the citizenry will not be making much hoped for progress.


The above is a ten year view reflecting the percentage change from the previous year of two inflation measures.  The blue line is the overall Consumer Price Index (CPI) while the red line is the Median Consumer Price Index which identifies core inflation – a less volatile inflation measure.

The red line, while less volatile has consistently held north of the 2% area for several years while the blue line has begun to hold this level more consistently in the last couple years.  The behavior of these measures over near-term months will be important as we monitor wage growth rates through the employment market.

This has not been lost on the current Federal Reserve Chairman as he recently offered more interest rate increases are to come in light of the strength of the economy and budding inflation.

To emphasize, if wage growth rates continue to unfold and inflation continues at a similar growth rate we will not be experiencing the net improvement we need to see in terms of the citizenry “catching up” with price growth rates in markets generally in recent years.

These dynamics play an important role in all of our lives being the impact inflation has on us once our wages are received.  This is a big picture, societal perspective that plays out in markets albeit not easily pointed to if you will.  We will share accordingly as these relationships unfold.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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