Wage-push inflation

METARs who lived through the inflation of the 1970s will remember the “wage-push” inflationary spiral. Workers who lost purchasing power due to inflation demanded higher wages. This increased employer costs which they passed on to their customers.


**Rising Wages Could Complicate America’s Inflation Cool-Down**

**Economists hoped that as households shifted spending back to services, price gains would cool. That effect might be less pronounced now.**
**By Jeanna Smialek and Ben Casselman, The New York Times, March 31, 2022**

**Economists have been waiting for Americans to shift from buying goods, like furniture and appliances, and toward spending on vacations, restaurant meals and other services as the pandemic fades, betting the transition would take pressure off supply chains and help inflation to moderate.**

**Rapid wage growth could make that story more complicated. Demand for services is rising just as many employers are struggling to find workers, which could force them to continue raising wages. While positive for workers, that could keep overall inflation brisk as companies try to cover their labor costs, speeding up price increases for services even as they begin to moderate for goods....**

**Services inflation is now also coming in fast. It ran at 4.6 percent in the year through February, the quickest pace since 1991....Americans still spend nearly twice as much on services as on goods overall....** [end quote]

Rent is counted as a service and is rising fast. Many people are priced out of buying a home due to rising prices and are forced to rent, increasing the demand for a limited supply of rental units.

Hands-on labor for services can look for higher wages in many alternative sectors. For example, health care aides may make higher wages in fast food or hospitality. Mandating higher wages in one sector (e.g. health or child care), while good for workers, will inevitably increase inflation as employers compete for a limited pool of workers.

The bond markets show that inflationary expectations are not yet entrenched. The longer-dated Treasury usually yields more than the shorter-dated Treasury (the normal positive slope of the yield curve). This would become steeper if bond traders expected long-term inflation. Instead, the yield curve is flattening and will soon invert, often a sign of impending recession.


Traders don’t seem to be considering the possibility of stagflation, where the economy stalls while inflation increases. In that case, TIPS (and of course I-Bonds) would be a better choice.


The bond market is doing terrible since $Trillions of bonds are losing value as the Fed is anticipated to raise interest rates. Interest-rate derivatives show that investors now expect short-term rates to reach 3% next year—up from less than 0.5% now and near zero before the Fed’s recent move. But that’s still a negative real (inflation-adjusted) yield.

Even the 3% fed funds rate would probably cause a recession and a severe shock to the stock market, which is dependent on the crack cocaine of negative real-yield loans. But that might not be enough to quell inflation – a positive real yield may be needed.


All assets are in a historic bubble. Be careful out there – the pin is getting closer.



An important variable wrt the stickiness of wage increases is the number of union workers whose wages and benefits are in contracts.

While union membership in public organizations has been relatively stable, union membership in the private sector has fallen from 16.8% in 1983 to 6.1% now.

The share of employees in unions increased from 10.3% to 10.8% in 2019. Still, that’s less than half of the rate in 1983.


Without the protection of a union contract, recent wage gains can be taken away as easily as company paid pension plans and retiree medical coverage were taken away in the 90s.