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Uh Oh, The Citizenry Is Onto The Non-Transitory Price Inflation Issue

CAMS Weekly View from the Corner – Week ending 10/15/21

October 18, 2021

A new word is beginning to surface in our collective vocabulary here in the fall season of 2021: Striketober. There has been building momentum of large portions or even entire company work forces refusing to report to work in light of inabilities to come to collective wage agreements here in the fall season. In October this has been building in its momentum and seems to be broadening out across industries. This past week the well known John Deere Company seen over ten thousand employees spread out over fourteen locations walk off. Succinctly speaking, an offer of 5-6% pay increases were viewed as not enough from their work force. Upon first glance such a level of pay increase may confuse a casual observer as to why this would be rejected. From our perspective, upon seeing these type of headlines, it gives us an involuntary “uh oh” audible in that the citizenry’s work force is fully awakening to the on-going price inflation backdrop of which the Federal Reserve has opined to all of us for months now is merely transitory. We have the analytical uh oh observation in that the citizenry (regardless of the official language from the money printing entity Federal Reserve) is laying down their own opinions on the topic by voting with their feet. Speaking to the point while offering this a bit differently; they seem to be soundly stating that if our prices are going to continue to get jacked upward then we are going to get serious about our wages also getting jacked upward. Inflation Expectations Price inflation is a fascinating topic that offers endless tributaries of discussion points to fully address it. Just one aspect of this is the collective psychology of inflationary expectations. As the citizenry begins to disbelieve policy officials and their narratives around the topic they simultaneously adopt a view that price inflation is here to stay and develop a psychology that it will continue to rise rapidly. This is when expectations begin to entrench themselves into citizenry action. This is when their psychology morphs from a hunch into a firm expectation that notably higher prices in society are not, well, transitory but rather more permanent. When this occurs we begin to see it surface through evidence of societal actions as well as words entering the lexicon such as “Striketober.” This results from headlines of entire work forces walking off their jobs in light of pay increases that seems fair if not good on the surface but is not a pay increase at all in reality. (Hold that thought.)

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Above is a decade long chart of the University of Michigan’s Inflation Expectations Survey.  With our red line annotation we can see here in 2021 price inflation expectations within the citizenry have skyrocketed.  The velocity of this uptrend is up there with anytime we have seen in the previous 40+ years.  This represents historically significant change in a short period of time. The above is direct evidence that citizens have rapidly scoffed at the FED’s official transitory inflation view.  For the FED’s part they continue to inform us they are looking at the situation.  More recently from Federal Reserve land we have heard a reduction of their money printing may be coming “soon” (more ambiguity) with an initial reduction number of $15 billion being floated around. If/when this occurs this will mean that rather than creating $120 billion fresh new dollars out of thin air every month they will only create $105 billion fresh new dollars out of thin air every month.  As a citizen, to the extent your own inflation expectations have been rising; will that type of paltry reduction in money printing push your expectations on a southbound trend? Wage Demands Are About Price Inflation Above we offered that in the case of John Deere’s 5-6% pay increase offer that in reality it doesn’t represent a pay increase.  This may seem strange and yet underlines for us the awakening of the citizenry to the price inflation backdrop. When we say “in reality” we are emphasizing “real” as in real wages.  The real part is when you subtract the inflation rate from the pay increase rate.  Since the spring of 2021 the overall Consumer Price Index has been coming in consistently above 5% with most months very close to 5 ½%.  Do the math on a real basis and you see why in reality we offered above the 5% area does not represent a pay increase. Interestingly, dating back over two decades, the Federal Reserve has a long established stated price inflation target area of 2%.  This has been in place as a message to the nation that north of 2% is undesirable in their view and with this would act as a signal that they would take action to reduce the inflation rate and any building inflation expectations. With all of the above, obviously the inflation rate and the inflation expectations are far beyond 2%.  Now we are seeing wage demands increasing notably. So when you see a headline that “x” company work force has walked off realize it represents a very large economic storyline playing out of which can get fully out of control (from here) if the nation’s inflation fighter (FED) doesn’t get meaningfully onto the scene ASAP rather than “soon.” I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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