When wage growth doesn’t buy you more stuff

July 13, 2021

Wages are surging as labor shortages give workers leverage to ask for more money. One big company sees this news as an opportunity to jack up prices.

Why it matters: A raise in your pay doesn’t mean much if there’s a commensurate increase in the prices of goods and services — your spending power will be unchanged.

Driving the news: Michael McGarry, the CEO of paint and coatings giant PPG Industries, told Bloomberg that his customers can’t argue with the higher prices his company is charging them.

  • Raw material costs are going up — PPG is exposed to rising oil prices — and customers have a greater capacity to pay.
  • “This work-from-home phenomenon is going to lead to additional wage inflation because people are going to have the opportunities to figure out where they want to work,” he added.

What they’re saying: “Why will consumers pay more? Because they can afford it,” SGH Macro Advisors economist Tim Duy writes in a note to clients.

  • Duy says that inflation measures like CPI should be considered in the context of other key variables.
  • “The main event is the dynamic between expectations, inflation, and wages,” he writes. “One part of that dynamic is firms believing the consumers no longer have a choice but to absorb price increases.”

What to watch: Duy says to keep an eye on this dynamic as it, among other things, may complicate the Federal Reserve’s efforts to stimulate employment while maintaining price stability.

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