Wage increases allow workers to increase or maintain their standard of living, which is usually good for the economy. However, wage increases can also contribute to inflation. How can this happen? Watch this latest video by GreenUp’s Chief Investment Officer Daniel Greulich to learn about a wage-price spiral and how it affects the economy.Click Here for the Full Video Transcript
Hello, I am Daniel Greulich, Chief Investment Officer at GreenUp Wealth Management. With the rate of inflation moderating, we are seeing stickiness in the arena of wage inflation.
Wage inflation is the increase in wages over a period of time. This phenomenon may appear beneficial to workers, yet in economics many perceived benefits are a double-sided sword.
It is true that as wages increase, workers are able to purchase more goods and either increase or maintain their standard of living even during inflationary environments. This is positive overall for the economy and the stock market. However, issues arise when wages become the cause of inflation, which happens during a wage-price spiral, not the byproduct. A wage-price spiral occurs in a tight labor market, where there are more jobs than employees. In this environment, employers offer higher wages to attract employees. Those employees, who have the bigger paychecks now- they can spend more money on goods and services. This thus ultimately increases demand, and the surge in demand can compel companies to elevate their prices to offset the heightened cost of labor. This is a cyclic process that, if left unchecked, can lead to a perpetual inflationary spiral, which can be very difficult to control.
As investors, it’s essential to understand the potential implications of wage inflation. Knowing whether wage growth is supportive of a healthy economy or trending towards an inflationary wage-price spiral, is the difference between a supportive or flat Federal Reserve and a restrictive one. Currently, wage inflation has been supportive of the economy, but we continue to monitor the economic indicator as inflation moderates and the employment market remains tight. Thanks for joining today!Show less