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The Downside of Escalating Wages Chasing Escalating Prices

CAMS Weekly View from the Corner – Week ending 10/22/21

October 25, 2021

In our previous edition we addressed the notably building wage demands taking place throughout society.  Striketober has been a new word entering the cultural scene as more company work forces are choosing to walk off rather than accept seemingly fair wage increase offers. On the surface referenced wage increase rates seem fair until price increase rates throughout society are factored in.  With the larger backdrop accounted for (known as real wage growth rates) work forces realize, in real terms, they will be falling behind, or at best, standing still on their income fronts. As the tick-for-tack process of escalating wage demands chasing escalating prices in-turn invite even more escalating wage demands chasing even more escalating prices brings with it a societal downside of reduced wealth and hence reduced standards of living.  Simply, society cannot inflate itself to increased wealth and hence a higher standard of living.  That has been tried ad nauseam throughout economic history always resulting in reduced living standards at best and outright economic/societal disaster at worst. Removing any biases to any aspect of the large economic and societal wheel whether it be siding with employers, employees, a certain political class or even how insulated someone may feel they are via their positioning within any of the large classes mentioned the vast majority of citizens get poorer via reduced wealth on a real basis.  The net effect of the process is incomes remain much challenged to keep up with the prices the consumer within us must pay. Wage Push Inflation The above generally describes what is known as wage push inflation.  As wages chase prices companies’ in-turn increase their product/service prices further to offset their newfound increase in labor costs as well as rising prices of the various inputs needed to make their products and services.  Furthermore, their general operating, transportation and production costs rise as well.  All told, as shared, it becomes one large wheel of escalating prices with resulting lower standards of living.  Very few win when the upward spiraling inflation wheel is spinning round and round. Inflation Pass Through Vehicles There is a fancy economic phrase that is not complicated at all.  We have already described it above and to a person, operating in society generally, already intuitively knows this phrase and operates on it in their lives in particular if they have ever ran anything north of a lemonade stand businesswise. This simply means when businesses incur increased costs they pass those through to consumers via increased pricing of their products and services.  Importantly, often this is not a one-for-one pass through in that every dollar of increased cost is not and usually cannot be passed through to consumers.  With this, if a business is incurring increased costs and cannot pass all of them through this will equate to lower profit margins and difficulty in increasing their profit levels. The Stock Market Will Keep My Standard of Living Steady In times of inflationary periods stocks are pointed to as a means of protecting wealth because they are able to pass society’s inflationary prices on through to end consumers.  Some industries are better equipped to do this by the nature of the essentialness of their products and services to consumers.  The problem with the view that the stock market is “bullet proof” in inflationary times is that businesses typically cannot pass through every dollar of increased costs.  Ultimately, when profits are not growing (profit growth is the ultimate lifeblood of stock prices) this brings with it a challenging environment for stocks generally to move higher and higher and higher.   It is the “higher and higher and higher” part that is necessary to keep a person’s standard of living in place via stocks because in inflationary period’s goods and services prices are doing just that.  Hence, this is why very few people win, regardless of affiliations and biases when the aforementioned wage push inflation scenario takes hold. An example of this is the well known Proctor & Gamble Company reporting quarterly earnings several days ago.  Their product lines are vast and all of us use at least one of if not many of their products. Sales were up from a year ago while profits were down because of lower operating profit margins on the back of increased costs.  As an aside, they stated they will be increasing prices on their products as they see no easing in cost pressures. The downside for we the citizenry in inflationary times is it is very difficult to remain untouched by the negative impact of our incomes meeting increased pricing pressures which equates to a lower standard of living. For the Federal Reserve’s part (our nation’s inflation fighting entity) they continue to inform the citizenry they are on the scene watching and pondering.  They have continued to offer they are not sure yet if the employment market has recovered enough in order for them to take away all of the emergency money printing initiated 18 months ago. This while there are help wanted signs on nearly every building and website in the United States.  Interesting. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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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