With the Federal Reserve and other central banks obsessed with avoiding a 1970s-style “wage-price” spiral, US GDP data last week showed that the risk of inflation remaining high is more nuanced.
Call it a “profit-price” spiral.
In many ways, the US labor market is as strong as it has been for decades. Since labor is the single largest factor in total business costs, policymakers are right to worry that “excessive” wage demands could fuel or even accelerate inflation.
But seen through the prism of profits, corporate America is also in bad shape, especially big business. In the second quarter of this year, corporate America raked in profits that, according to the cut, were the highest on record, or close to levels not seen in more than half a century.
It is also an inflationary threat, but policymakers talk about it far less than the risk that wages will fuel a price spiral that would only be crushed by interest rate hikes like those administered by the former Fed Chairman Paul Volcker in the early 1980s.
The battle between labor and capital, which has seen capital take an ever-increasing share of national income over the past 30 years, is not a new issue, certainly not politically.
But with inflation at its highest level in four decades, it appears to be a political challenge, which the Fed must address, says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
“I’m sure rising corporate profits are indirectly encouraging the Fed to raise interest rates. To the extent that prices are rising everywhere and corporate profits remain high, these are a direct corollary to higher inflation,” he said.
As a percentage of GDP, U.S. corporate profits in the second quarter rose to 12.25%, around their highest levels since 1950. Non-financial corporate profit margins reached 15.5% during the same period, approaching last year’s peak. back to the 1960s.
Less surprisingly perhaps, nominal profits in the second quarter were the highest on record. Still, breaking the $2 trillion barrier is remarkable.
It comes at the same time that U.S. labor market conditions are also the tightest in decades. The unemployment rate was lower than today’s 3.5% more than half a century ago, and there are two job openings for every unemployed person.
While worker strikes and industrial disputes are less likely in the United States than in Europe, Fed officials would not appreciate wage growth matching inflation, let alone exceeding it.
They would say this would have one of two consequences, both of which run counter to their dual mandate of price stability: higher wages are passed on to consumers, leading to even higher inflation; or companies simply downsized.
Fiscal policy is better suited to limit the pricing power of US companies. As Robert Reich, a professor at the University of California, Berkeley and former Secretary of Labor, notes, the Biden administration passed a 1% tax on stock buybacks in the recently enacted Cut Inflation Act. , and a minimum corporate tax.
That doesn’t go far enough, he argues, but acknowledges that policies such as a windfall tax, price controls, higher taxes on corporations and the wealthy and bolder antitrust enforcement face challenges. strong opposition in Washington.
Absent a powerful fiscal push, it behooves the Fed to use the blunt instrument to undermine employment and sow higher interest rates in the recession.
“It’s the only tool in the Fed’s toolbox. The problem is that it places most of the burden of fighting inflation on the average worker and the poor,” Reich told Reuters.
There is no doubt that Fed communications focus more on the risks posed by wage pressures than on corporate prices.
The minutes of the July 26-27 Fed policy meeting show seven mentions of “wage” or “wages”, 17 of “labour market”, eight of “employment” or “jobs”, and none of ” profit “.
Transcripts of Fed Chief Jerome Powell’s press conference on July 27 show nine references to “wages” or “wages”, 38 mentions of “labour market”, 15 mentions of “labour” or ” jobs”, but not a single mention of “profit”. ‘, ‘corporate’, ‘company’ or ‘companies’.
If the political establishment in Washington is unwilling, and if the Fed is unable, to calm potential price pressures from the corporate earnings boom, perhaps the economy will do it for them.
With tighter financial conditions slowing activity and demand, earnings growth is expected to slow and corporate margins are expected to shrink.
“Earnings growth is slowing and heading towards zero. This implies pressure on the margin, the consensus of which now predicts a decline of 5% in 2022,” Societe Generale (OTC:SCGLY) equity analysts wrote on Thursday.
Source: Reuters (by Jamie McGeever; editing by Andrea Ricci)