Inflation Isn't Coming, It's Already Here
Why the inflation outlook is linked to the labor market
There isn’t much that you can get people to agree on today. It seems whatever one person’s opinion is about something, there is always someone who knows more or better than you. Many days it seems if I said the sky was blue, there would be someone that would argue with me on that.
Agreeing is not a problem when the word inflation comes up. No matter what you’re doing in your day to day living inflation keeps coming up. If you’re at the grocery store, gas pump, restaurant or almost anywhere where you have to buy something you notice inflation. I’m still looking for something that has gone down in price. I think I’m just going to resign to the fact that everything has gone up.
My days are spent talking to people. I talk with clients who are both employees of companies and also business owners of various sized companies. I’ve spent some extra time talking with some business owners over the past few weeks. I’m was wondering what they’re seeing. What does the future look like and how are they adapting? How does that match or differ from how I’m viewing things? It’s made for some very interesting conversations.
I want to get the story from small businesses leaders. Many times what we read in news sources are reports from the large public companies. Most of the information that they share is on their earnings calls or through interviews. Yes it’s important to know what multi million and billion dollar companies see but it’s also important to gauge the current state and outlook of small businesses America.
This report by the Small Business Administration (SBA) in 2019 shows that small businesses account for 44% of economic activity in the United States.
I’d say that is a rather important group. You probably stop by them all the time. Next time you go into a business ask them how things are going. Talk with them and you’ll gain an understanding and appreciation on many fronts for small businesses.
People are buying and buying
Most small business owners say there is a constant and strong demand for their products and services. For many businesses they can’t even sell their product because they don’t have inventory to sell. People want to buy. The issue is for many businesses they’re so backlogged that their sales are pushed so far out.
It’s not showing any signs of letting up. Imagine if the supply chains were caught up and we didn’t have the port and shipping delays. Where would sales be? For many companies sales are great now with the backlog. Imagine a clear backlog. Yes that day may come but it’s going to take a while.
Here is what has happened in personal consumption expenditures. This sure doesn’t look like a chart that is slowing or showing signs of decelerating.
What demand is doing to prices
One of the most covered industries on what has happened to price inflation is the auto sector. New vehicle production has been extremely limited and slowed due to first the virus but now it’s the chip shortages. This has resulted in a complete explosion in the value of used vehicles.
Then we have a breakdown by the type of vehicles.
Just by owning a vehicle it has turned into an investment gain that you hadn’t even planned on. Who says vehicles are a terrible investment? I saw this funny tweet on Twitter Monday quoting someone from the WallStreetBets forum on Reddit. Interesting thought.
Is this sustainable?
One word that I’m tired of hearing is transitory. That’s all I’ve heard for the past six months. I think that has become one of the most hated words of 2021. Transitory means temporary and that it will pass.
I think everyone hopes this is temporary and will pass. Nobody wants prices to keep moving up at this pace. Inflation hitting levels of 2008 is a bit worrisome. I prefer not to be reminded or see any comparison to 2008.
Runaway or hyper inflation is what some are getting fearful of. Price increases in a lot of goods are rising to almost unsustainable levels. Once companies pass on the full increased price realization to consumers there will be sticker shock.
As I was writing this post Jack Dorsey, the CEO of Twitter and Square shared his thought on inflation via his Twitter. I sure hope he is wrong.
We all have seen the endless examples, pictures and stories of the affects on the supply chains and inflation. I could make pages and pages of them. I’m only going to share two examples that stuck out the most to me after all the people that I spoke with last week.
Starting construction on a house this month versus a few months ago would have resulted in a 30% increase in the total cost to build a house.
A grocery store is only getting 50% of the order they recently placed. They’re worried what they’re going to do as their supply chain is only worsening.
Fixing the biggest inflation driver
Everyone is waiting for the supply chain to get fixed. The problem that also spills into the supply chain issue is the on going labor market issues. The transport industry has a drastic shortage in truck drivers. Wanted: 80,000 truck drivers to help fix the supply chain. They’re fighting the same battle as other businesses in not being able to get the help needed.
With the demand so high for workers we’ve seen wage inflation rise significantly. Competition for workers is fierce. You don’t have to look very far to see for hire signs. They’re literally everywhere. Hiring challenges have prompted companies to increase wages and offer other incentives to entice workers.
The issue is when you’re hiring people at say $20 an hour for a job, you don’t go back to them in a year and say well we’re going to drop you down to $18 an hour now. There are new wage floors being put in certain jobs and industries.
When you add someone new to a team where the existing team members doing the same job are making $100,000 a year and the new person is making $150,000, what do you think happens to all the employees making $100,000 year? They’re going to get increased to $150,000 or they will go to a competitor that will give them $150,000 a year.
Where this is really hurting is in the entry level jobs. Many small businesses who rely on entry level workers are unable to compete against the largest companies in the world for those workers. How does a local small business compete against Amazon’s current $22 an hour, benefits, $3,000 bonus and 100% paid tuition offer?
Or with the rise of remote work, the largest companies in the world can hire people in any community in the country with a WiFi signal. A lot of businesses don’t have the ability to offer a work from home option. This creates a hiring disadvantage.
Wage inflation is the largest threat right now to the overall economy and small business ecosystem. Labor costs are the largest expense to companies. For some companies that may even exceed 70% of a company’s expenses.
Some wage inflation is good and certain jobs are overdue for wage increases. The problem is we’re clearly starting to see hyper wage inflation. It’s a result of the competition for help.
How long these heightened levels of inflation stick around is going to depend upon what the labor market does to wage inflation moving forward. As the labor market improves, it will mean that wage inflation has stabilized and that will improve the supply chain bottlenecks.
Jobs need to be filled otherwise we will continue to see these unhealthy levels of wage inflation. Small business on main streets in America can’t compete against the biggest companies in the world for the same workers. That’s a losing battle for small business America.
Thank you for reading! If you enjoyed Spilled Coffee, please subscribe and/or give a gift subscription for others.
To share this post and Spilled Coffee with others, just click below to share it.