Only You Can Prevent Wildfires
Markets appeared to come around Tuesday to what I'd describe as the "neutral" character of the latest US CPI report.
By "neutral" I certainly don't mean benign. Price growth is nowhere near target and if the last two MoM readings on the core gauge were any indication, it won't be getting there anytime soon.
Rather, by "neutral" I simply mean relative to consensus and to what, headed in, were whispers of an overshoot with the potential to trigger a rout in equities and an extension of last week
What if the assumption that wage growth and inflation are connected proves to be wrong? Not going to be good for the under 50k crowd who may decide they are better off on unemployment, WIC, etc.
The three categories of economic inputs are land, labor and capital. All three cost money to acquire, for obvious reasons, and if those costs increase, firms only have two choices to maintain profits, increase sales or reduce costs. Costs are the product of a quantity of input used (more labor, more steel, more wheat …) times the price paid for the input. A rise in the price paid for labor will, ceteris paribus, cause costs to rise and profits to fall. To maintain profit margins in the face of rising input costs, the firm must sell more stuff (only works with fixed costs) or sell its stuff at a higher price. Those are all the choices. So, all other things being equal, rising wages –> rising goods/service prices (aka inflation) if the good or service is inelastic as to price, ie. it is a necessity.