The whole process of simply paying employees has become increasingly politicized with competing agendas shifting the focus away from the fundamental idea of a fair day’s pay for a fair day’s work. We have advocates for a higher minimum wage, federal, state and local versions, for a competitive wage, for a living wage and so on. All of this has been further accentuated by Covid-19.
Investors should recognize that labor costs are a material factor in product and service pricing and, that good labor relations are essential to long-term success. Currently, domestic economic activity is under pressure due to a shortage of available workers, supply chain issues, and the effects of Covid-19. Managements are attempting to mitigate work force shortages by raising wages and developing other inducements. For example, Walmart, the nation’s largest private employer has recently announced a significant enhancement to its associates college program.
Consumers and investors should understand that wage cost increases will eventually be passed through in higher prices, as is the case for any cost increase, that can’t be offset by savings. Whether the current employment/wage issues will lead to increased inflation is a more difficult question. Wage increases are not transitory, as it is simply unrealistic to assume that pay raises, once given, can be retracted. Other costs, particularly commodities, tend to be subject to fluctuations and some increases in commodity process are spikes that can pull back fairly quickly. Look at what is going on in lumber prices.
Investors should consider the difficulties associated with managing a portfolio in a period of potentially higher inflation. It is definitely not a one size fits all exercise. Accordingly, it might be a good time to make sure that your advisor(s) are fully aware of your concerns and objectives.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®