Higher Prices and Inflation-Part II
Since our last Commentary, a lot has changed on the inflation front. At that time, we discussed 6 key reasons for higher prices and inflation. As promised, in this issue we will further discuss one of those: the labor shortage.
These are trying times for consumers and investors alike. It’s difficult to accept rising prices though we know that most of the current inflation rate increase is the result of desperately needed actions taken during the global pandemic shutdown to stop the downward economic spiral and literally get the business world back open. So, the cause of this inflation cycle is definitely different from others and is requiring a detailed and delicate playbook to get it turned around. AND IT WILL TURN AROUND.
It’s hard to realize just 4 short years ago, in 2018, the Fed raised interest rates 4 times. That action dropped the inflation rate from 3% to 2.2%. Predictably, stock prices dropped. From August into December, the decline was approximately -14% for the S&P 500, -18% for the NASDAQ. The S&P 500 was down -4% for the year. The U.S. was also in a trade war with China over unfair trade practices and intellectual property theft. It was a very tense time and stock prices were volatile. Investors were concerned and selling. That war escalated through 2019 and accomplished nothing…yet, stocks recovered. The S&P 500 finished 2019 up over 31%. Investors who stuck with their long-term strategies throughout 2018 were rewarded. Those who sold during those 5 months of downturn missed out. Most of the S&P 500 recovery occurred in the first 4 months of 2019. (See John’s column.)
Rising labor costs have added to inflation. One of the side effects of the pandemic was the Great Resignation, as offices closed and people were either laid off or forced to work from home and couldn’t. Many critical supply businesses did not close and workers were forced to stay in risky pandemic situations, so many quit or got sick and were unable to work. In general, many of the 47 million workers who quit their jobs in 2021 were already dissatisfied with their working conditions. According to well-documented reports, people took advantage of the shutdown to seek improved work-life balance and flexibility, higher wages, and/or a better company culture. This has been borne out since November 2020, as hiring rates were higher than quit rates. Workers literally found different and better jobs, now dubbed “The Great Reshuffle.” The greatest worker shortages are in the lowest paying industries: transportation, health care, social services, education, and the accommodations and food sectors, with the food sector suffering the most. In more stable, higher paying industries, the quit rate has been lower but there’s still a labor shortage because of a lack of experienced, high tech skilled workers. The low paying food service, hospitality and retail sectors continue to struggle and have been forced to raise wages. There is a direct correlation between pay rates and quit rates.
According to the U.S. Chamber of Commerce, some of the solutions to our labor shortage are to offer and expand childcare access for workers, offer “second chance” hiring, and to provide opportunities for new and existing staff to be retrained at higher skill levels. Another solution would be to increase immigration limits, especially unskilled workers for the many job openings in the aforementioned lower paying industries. In the meantime, as job openings persist, companies raise wages, allowing people to spend more, putting pressure on supplies, leading to the current price increases and rising inflation.