If you’re wondering why it is that inflation continues to be so persistent, you’re not alone. The Fed continues to struggle, but they’re not being unclear about their belief in the direction of rates… higher. The markets aren’t listening, partially because they don’t want to, but if market participants would pay a little bit closer attention, they’d see why we’re still seeing above-target rates. The most obvious reason that we’ve not seen a collapse in inflation yet is because many workers still haven’t caught up on the inflation we experienced over the last several years.
Take for example labor unions. The intent of a labor union, of course, is to protect workers’ rights and negotiate better pay. The problem in a period of high inflation, however, is that they generally locked in pricing for workers through collective bargaining agreements with significant duration, and did not account for significant changes in pricing for every day goods. Well, unfortunately for businesses, in many cases, it’s time to pay the piper. UPS recently agreed to terms with their staff. United Autoworkers have also been hard at work looking for increased wages for staff at Deere and CNH, while also preparing for major pushes against General Motors and Ford.
Last year, there were 23 major work stoppages caused by labor unions asking for improved wages, and this year there have already been 16. The results of these work stoppages are not small, single-digit improvements either. In many cases, we’re talking about double-digit changes in wages for enormous workforces. As we start counting these changes in wage and multiplying them by tens and maybe hundreds of thousands of workers, it reminds us that inflationary pressures are not just about prices, but also about spending capacity.
Money printed by the Fed would normally be met with a decreased value for the US dollar, but global weakness following the pandemic has mostly held the dollar up. But this year, with a bit of pressure on the dollar, it’s really starting to feel like everything is more expensive, and it’s not surprising that the unions would be looking for more. This brings us to recent meetings in Jackson Hole… while there was a little bit for every market pundit in these meetings, the overall tone from the Fed suggested that not only will be remain higher for longer, but we may see continued increases in the Fed Funds rate. This may seem to be taking a long time, but the real world has many “collective bargaining-type” obstacles that don’t just change overnight. Political pressure can always get in the way of what should be done, but if JPow has proven one thing, it is that this Fed is resolved to get to its targets.