Wages and Salaries are Not the Cause for High Prices
Another take on wages and salaries outpacing inflation. Not so says Robert Shapiro.
Inflation Reality Check: Don’t Blame Wages and Salaries for High Prices, Washington Monthly, Robert J. Shapiro
Yes, economics can be complicated, and economic reporters work under tight deadlines. There is no excuse for the media meme blaming rising wages for much of today’s inflation. The Wall Street Journal summed up this erroneous view in a recent headline, “Rapid Wage Growth Keeps Pressure on Inflation.” The Journal’s self-serving take is refuted by the data and rejected by the International Monetary Fund. And with corporate profits growing much faster than wages and salaries, it’s morally noxious to imply that ordinary people are greedy and disrupting the post-pandemic economic recovery.
AB: Lets back up a bit and see what our resident expert NDd says . . .
Nominally, average wages for nonsupervisory workers increased 0.2%, while prices deflated by -0.1%, meaning that “real” average wages increased 0.3% for the month.
While this only returns them to April’s level, and -2.2% below their December 2020 interim peak, they are also 1.5% higher than their pre-pandemic levels, and more importantly 1.3% above their recent June 2022 lows. Essentially all of the volatility in 2022 can be laid at the feet of the huge increase, then huge decrease, in gas prices.
It appears both talking in a similar fashion. Back to Robert Sharpiro . . .
I always thought that it’s a good thing when people’s wages and salaries rise faster than inflation because it means most people are getting ahead. It’s also the norm. No one complained, certainly not the Journal, when average hourly wages and salaries grew 9 percent, and inflation rose 5.1 percent, during Donald Trump’s first three years in office. (I use the Fed’s preferred measure for inflation, changes in prices for personal consumption expenditures.) Then came the pandemic, and as unemployment soared and swooned while growth swooned and soared, people’s average hourly wages and salaries still increased by 5.5 percent while prices rose only 1.3 percent.
Yes, inflation jumped to 6 percent in 2021, thanks to supply chain disruptions, energy prices spiking more than 50 percent, and rapid real growth pushing up average hourly wages and salaries by 4.9 percent. Those wage and salary gains lagged the price increases because when inflation heats up suddenly, businesses can raise their prices faster than workers can negotiate raises. But those wage and salary gains that followed the inflation didn’t cause it. In fact, they were in line with the increases of 2020.
In 2022, the trend continued as average wage and salary growth increased by 4.6 percent while inflation eased to 5 percent. Those eager to blame the 5 percent price jump on average workers sometimes cite the 1970s, when union contracts with automatic inflation escalators and expectations of higher prices by businesses and the public exacerbated the damage wrought by OPEC’s serial price hikes.
But the 2020s are not the 1970s. Inflation escalation contracts are long gone, and the financial markets and the public expect our current inflation to go down quickly. The New York Federal Reserve Bank, for example, reports that from September 2021 to last December, people’s expectations for inflation three years out fell from 4.2 percent to 3.0 percent, and the expectation for five years out is 2.4 percent. Far from fearing that wage gains are fueling inflation, the public and the markets reasonably expect that price increases are headed toward the Fed’s own 2 percent target for inflation.
It’s outsized corporate profits, not wage and salary gains, that have been and are outstripping inflation—and perhaps contributed to it. Inflation measures the increase in the prices that companies charge, and their profits represent what’s left over after paying their workers, suppliers, vendors, and taxes. During the pandemic, from the first quarter of 2020 to the third quarter of 2022, post-tax corporate profits jumped 49.1 percent. That’s nearly three times the 16.8 percent increase in all workers’ incomes from wages, salaries, and benefits.
So, the next time someone tells you that wages and salaries are driving inflation, ask them how much their stock portfolios and dividends have grown.
Rising stock prices are an example of inflation. Only the well off have been seeing rising incomes, and they’ve been buying what people with lots of money buy. That’s debt instruments, real estate, high end art and shares of corporations. Those people had the money. Those people pushed those prices higher. Everyone else was treading water or losing ground, so there was little inflation in goods and services.
i do wonder why some blame their customers (and those who are in the 99% of all workers) for ‘inflation’ which is basically what the business newspapers and magazines do. they over look how their supply chains (these were and are created/managed by business all governments try to do is make it easier for business to transport goods) crashed, and lead to higher prices because as business has a wont to do, when faced with a threat, they will lock everything down, to wait for the threat to pass, but instead of taking the time to figure out how to improve and how to restart the chain, they ended up with important parts the of the chain no longer available, and that suppliers shutdown or moved on to other products, leading to much higher prices for important parts and materials than ever expected to exist, and leading to higher prices for their products to customers. though some producers of products figured out they could make more money with less production. then the energy crunch happened and a war. that added to inflation, course some want to blame government help to its citizens as being the prime cause, thing is, almost all that in 2021. and some of that was put in place by the previous administration anyway. then they want to blame those who decided their jobs didnt pay enough to continue doing the job, course there is also the fact that some just decided to retire for the same reason, which lead to the people getting some better wages than in the last 30 or so years
wdw:
Just keep in mind, Direct Labor has been made a small part of the cost of manufacturing even in the US. It is the other costs that impact prices far more than Labor.
true,but to hear businesses talk, its just the major component of any increase in inflation or prices. never mind that most of it was caused by things they did or controlled and messed up
w d w
In other words, they can raise prices because they can? Light rain tomorrow, price increase! Not Schooner Tuna companies I take it. And you would be right. My favorite question was, “what increased?”
Inflation likely cooled, but the details are more complicated.
NY Times – Feb 14
Inflation likely cooled on an annual basis for a seventh straight month in January, continuing a deceleration that has come as supply chains have healed and prices have increased more slowly or even declined across an array of goods as varied as used cars and women’s dresses.
But economists expect Consumer Price Index data scheduled for release on Tuesday to show that price increases picked up briskly on a monthly basis in January. That’s likely true across both key measures, the one that includes gas and groceries and a “core” index that strips those products out on account of their month-to-month volatility to get a better sense of the underlying inflation trend.
The combination underlines that while the Federal Reserve has been receiving positive news on inflation — price increases are no longer relentlessly accelerating, the way they did for much of 2021 and the first half of 2022 — it could be a long and bumpy road back to normal.
“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed,” Jerome H. Powell, the Fed chair, said at an event last week.
Economists surveyed by Bloomberg forecast that the Consumer Price Index climbed by 6.2 percent in the year through last month. That would be a drop from 6.5 percent in December, and notably slower than a peak of about 9 percent in June 2022. …
The market rally faces a test from new data.
NY Times – Feb 14
Investors girded themselves for government data on Tuesday that is expected to show a mixed picture for inflation, which has been cooling since late last year.
Futures on the S&P 500, which allow investors to bet on the index before markets officially open, rose slightly and U.S. government bond yields fell slightly.
Investors have taken solace in recent months from a consistent slowing in inflation, helping push the benchmark U.S. stock index up more than 6 percent in January. The prospect of a continued drop in the pace of price rises had raised hopes that the Federal Reserve would soon end its campaign of raising interest rates, which tends to lower inflation but also raise borrowing costs for consumers and companies. …
(IMO, ostensibly, stock markets – also art markets, real estate markets, etc – are driven by Greater Fool Economics. You can always find someone who is willing to pay more for something than you did. Maybe. This is the risk-taking associated with such markets. It does not really apply to ordinary consumer shopping.)
Selling Trump Isn’t What It Used to Be
NYT – Feb 4
When Donald J. Trump announced his foray into NFTs late last year, capitalizing on public interest in his presidential campaign to sell cartoonish virtual trading cards depicting him as a superhero, he was derided for retreating to his huckster impulses.
Anyone seeking insight into Mr. Trump’s decision need look no further than his partner in the enterprise.
The online trading cards are the brainchild of Bill Zanker, a serial entrepreneur who has sold back rubs, gym equipment, self-help courses and, at times, Donald Trump himself. Before Mr. Trump’s political rise, Mr. Zanker co-wrote a book with him, teamed up in a crowdfunding business and, for several years, made Mr. Trump the centerpiece of a real estate road show that sold out sports arenas. Mr. Zanker once boasted in ads of paying Mr. Trump $25,000 a minute to speak. …
… To date, Trump Cards sales have hit $17.3 million, generating about $5.6 million in revenue, according to an analysis conducted by CryptoSlam, a blockchain data aggregator, for The New York Times. That total includes the $99 original price for each of the 44,000 cards that were sold on the first day, plus a 10 percent royalty each time any of those cards is resold on the secondary market.
For example, when an anonymous buyer paid $43,865 on Dec. 18 for a single Trump card that depicted him in black tie and tails, a $4,386.50 royalty went back to Mr. Zanker to be shared with Mr. Trump. It is not clear how revenues are split.
Industry experts said the Trump Cards’ sales were respectable, particularly after a cryptocurrency crash last year. Still, they pale in comparison to other NFT projects. Perhaps the best known, the Bored Ape Yacht Club, racked up $1.57 billion in sales in 2022. …