Is there an elephant in the room? We are hearing a lot about the fact that inflation is on the rise, but that it’s going to be transitory and nothing to worry about. The main reason for that we are told is that the base effects, the year on year comparisons are going to fade away roundabout the middle of the year in late June. Over a year ago the oil price spiked lower; one of the futures contracts actually went negative, but the actual spot price of oil got down just below $10 Currently it’s around about $66. So, obviously, year on year inflation is going to go up. There’s also no reason why oil shouldn’t continue to go on up so that the continuing base effect carries on for even longer.
The other issue is the disruption of the supply chains. Things are beginning to get back to some sort of normality, but there are still enormous dislocations, a lot of manufacturers are unable to supply parts because they can’t get parts themselves for all sorts of products. There’s a massive shortage of semiconductors as well, partly as a result of offshoring semiconductor production, the US is only a 10% provider of semi’s now compared to the rest of the world. There was a fire in a Japanese semiconductor plant earlier in the year and the Taiwanese are struggling to keep up with demand and that’s knocking on into things like auto companies having to shut production lines because they can’t get semiconductors to go into vehicles. So supply issues are going to be with us for some time before things get back to normal. How long that will take? We don’t know, but again the argument is that it will be relatively short lived.
Two other important points to note about inflation is firstly that it is expectations that drive inflation, which seems strange, but that’s the way it works; if you think prices are going to go up, then they generally do and that’s beginning to creep into people’s psyche, they’re beginning to see prices go up, and you will have too if you do the food shopping you will have noticed that extraordinary increases in in the price of food and that is beginning to hit everybody in their pockets, particularly the lower paid.
In the States, we have this bizarre position where the, the amount of income that people receive from the government is now exceeds a third of total income. People are living more and more on benefits and a lot of people are saying, well you’re just lazy, you should go out and get a job, but there again on the other hand, if people can manage to keep afloat by living on benefits they are quite likely to do so especially when they look at the salaries of some of the senior executives in the companies they work for. It’s kind of a raising of two fingers; we’re going to stay on benefits until you actually put wages up, and that is perhaps the elephant in the room.
There has been significant wage growth in the, in the US which has been ignored, mainly because people aren’t looking at the right set of data, the Bureau of Labor Statistics the BLS, which was set up in 1915, has been reporting in the same way ever since. It looks at hourly rates of pay and hourly numbers of hours worked, which conveniently understate the true picture. If you look at the actual total monthly wages data you’ll see a very different picture.
Here is the elephant
Q1 2021 wages were 6.6% higher than Q1 2020 wages.
Q4 2020 wages were 6.2% higher than Q4 2019 wages.
Q3 2020 wages were 5.7% higher than Q3 2019 wages.
Q2 2020 wages were 6.9% higher than Q2 2019 wages.
Over the past 10 years prior to the past 4 quarters, the highest single quarterly year-over-year wage growth was 3.6% in Q4 2018.
Over the past 20 years prior to the past 4 quarters, the highest single quarterly year-over-year wage growth was 4.5% in Q4 2006.
Over the past 30 years prior to the past 4 quarters, the highest quarterly year-over-year wage growth was 4.8% in Q4 1997.
You have to go back 40 years – to Q3 1981 – to find a higher quarterly year-over-year wage growth number (+8.5%). Will this number start coming down? There may be some more base effects to come, but a series we need to watch closely to help us determine just how long “transitory” can be.