Wage gouging, jobs numbers, Fed blunders mean more inflation

While the Federal Reserve has declared their fight to lower inflation is over, recent data suggests that may not be the case. The combination of labor’s wage gouging, the unexpectedly strong job market and the Fed interest rate cut blunder, will cause inflation to rise.

It appears that inflation psychology, of which I have been warning for years, is starting to grip the nation. The dockworkers ended their strike after their employer agreed to give them a whopping 62% wage increase over the next six years. That’s about a 10% per year wage increase.

That’s astonishing.

More astonishing was the support that the workers received from the public. Even some conservative economists said that they see the worker’s point. I heard one say that because inflation has increased by 24% since their last contract in 2019, the workers deserve a large wage increase.

The average American sees that and starts to believe that large wage increases are deserved. What will likely follow is large wage increases for nearly all workers.

That, of course, will worsen inflation as it adds to the price-wage spiral which, years ago, I noted would be the case if inflation was allowed to linger. The Fed allowed inflation to worsen by holding interest rates constant at near zero from January 2021 until June 2022.

Then they allowed inflation to linger when they paused their interest rate hikes in September 2023. Then they further allowed inflation to linger when they cut rates last month. These Fed blunders coupled with this newly developed inflation psychology will result in more inflation.

The Boeing machinists are emboldened by the dockworkers. They refused a wage increase of 12% immediately, then a 30% wage increase over the next four years. That will raise the machinists’ annual pay from an average of $75, 608 to $111,155, a whopping 47% increase.

Last month, the Fed cut interest rates by 50 basis points. Fed Chair Jerome Powell said that progress had been made which reduced inflation from over 9% to under 3%. Although still short of the Fed’s goal to bring inflation down to 2%, Powell was more concerned about the softening job market.

He noted that the unemployment rate rose from the low of 3.5% to 4.3% in July of this year. The number of new jobs added per month had fallen to just over 100,000 per month and Powell believed the trend was downward.

However, Powell was wrong. In August the number of new jobs topped 140,000 and the unemployment rate fell to 4.2%. In September the number of new jobs rose to over 250,000 and the unemployment rate fell to 4.1%.

Every economist will say that the full employment level is when unemployment is at 4%. That’s where we are today. There is no reason to stimulate an economy by lowering interest rates when inflation is above the 2% target and the economy is adding large numbers of new jobs monthly.

The Fed’s blunders are adding to the public’s perception that the inflation battle is over. Powell has suggested he will move slowly in the future, but more interest rate cuts are coming. Workers may believe that, but they also believe they have to make up for the inflation of the last four years.

The workers’ argument that they “need” a large wage increase to cover the higher prices is not valid in our economy. It would be valid if the US had a planned, completely government-controlled economy like Communism. There a worker contributes according to their ability, and they are paid according to their “need.”

In our system, a worker contributes according to their ability. They are paid according to the “value of their contribution.”

As I have noted in prior columns over the past almost four years, inflation is a cancer and must be treated early and aggressively. The federal government made the inflation problem worse by dramatically increasing the price of energy and by creating more excess demand by running up huge budget deficits.

The Federal Reserve made the inflation problem worse by incorrect Monetary Policy. Workers are making the problem worse by demanding huge wage increases. And, worst of all, inflation psychology is gripping the nation.

Within the next few months, the inflation rate will rise. If energy prices rise because of geo-political events, the problem will get much worse.

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