Worried about inflation? Not Just Pump Price, Check Pestabs

NEW YORK – Everyone would like to get paid more, but there is concern on Wall Street that too much could be a good thing.

Wages for workers in many industries are rising as the economy moves out of recession. And in the context of inflation, which is a burden for investors right now, a large and sustained gain in wages would be even more alarming than the price increases already seen for oil and other commodities.

When wages rise, they tend to stay the same, unlike commodity fluctuations. For example, after nearly doubling in the first four-plus months of the year, lumber prices have already halved. Some employees will voluntarily give up all or half of their wages.

That’s why the upcoming monthly report on the job market, on Friday, could be an even bigger deal for the markets than usually. In addition to showing how many people employers have hired, it will also detail how wages are rising for workers across the country.

Economists expect the report to see a 0.4% increase in average hourly earnings in June compared to a month earlier. If they are correct, this would be the first time the increase has been so high in three consecutive months, at least since such records began 15 years ago.

For now, many investors are not worried. They see wage growth eventually softening, which will put a cap on inflation. More people are being vaccinated, benefits for unemployed workers are becoming less generous and the reopening of schools in the fall will see parents return to work. This should mean that employers get more applicants to choose from, thereby lessening the pressure to raise salaries to fill openings.

Meanwhile, other sources of inflation, such as used cars and building materials, should see prices decrease as supply constraints and other constraints become apparent.

“We’ve already seen the highest monthly inflation readings of 2021,” said Brian Nicks, Nuven’s chief investment strategist.

However the danger is still real. According to a Morgan Stanley review, wage increases so far have been primarily driven by medium- and high-paying industries such as aerospace products and insurance. But it is becoming widespread lately.

For example, increased wage pressure is being seen in restaurants, grocery stores and petrol pumps all.

Look no further than Chipotle Mexican Grill, which has raised its restaurant wages by an average of $15 an hour. The company increased the prices on its menu by about 3.5% to 4% to help cover the extra pay.

“We really prefer not to increase prices,” CEO Brian Nichol said at a recent conference hosted by Baird. “But in this scenario it makes sense to invest in our workforce and acquire these restaurant employees and make sure we had a pipeline of people to support our growth.”

CFO Jack Hartung said he expects others in the industry to follow suit. Otherwise they will have to wash their hands of the workers.

Therein lies Wall Street’s fears about wage growth staying high. On the other hand, higher wages give workers more money to spend, which in turn takes the economy to a higher level. But in one scenario, companies cannot raise their own prices to cover their higher payrolls and maintain profits. This worries investors because stock prices track with corporate earnings over the long term.

Even if companies could pass the higher costs onto customers, it would result in a more permanent era of high inflation. This would dash the Federal Reserve’s insistence that so far high inflation appears to be only a temporary problem, as it is the result of shortages and other constraints.

So congratulate your neighbor on that growth, and hopefully you yourself too. Wall Street likely won’t.


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