The following is an excerpt from a longer article, Rechecking Our Inflation Predictions: Inflation is Here - But for How Long?
The cost-push side [of the inflation argument] reflects a lack of workers, a shortage heavily influenced by the COVID-19 pandemic. But I also fear there is a demographic issue at play that has not yet been studied. The Baby Boom generation has been termed the “pig in the python.” As it has aged through its lifecycle, it has transformed just about every aspect of life, including music, housing, fashion, and morals. Now that this generation is retiring, why would it not influence employment as well? The pandemic may have changed Boomers’ minds about staying on the hamster wheel.
To win scarce workers back, employers are having to offer signing bonuses, higher wages and more benefits. A perfect illustration appears in the October jobs report. Nonfarm payrolls came in above expectations, 531k actual vs 450k expected, with a big revision to the prior months reading (312k vs 194k). The unemployment rate dropped from 4.8% to 4.6%. However, average hourly earnings increased in excess of the Fed’s targeted inflation on both a monthly basis and on a year over year basis. The table below shows how much wages have increased in 2021.
Wages are a major input into the cost of manufacturing. These high rates of increase— 8 out of 10 coming in above the Fed’s target inflation rate of 2.0%—certainly lend credence to the cost-push argument for inflation.
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