Disruption of the middle class

[washparkhorn 9967]

source: Federal Reserve 

[washparkhorn 9967]

7 minutes ago, washparkhorn said:

The writer is chief economist at UBS Global Wealth Management:

In the world’s financial markets, US Federal Reserve chair Jay Powell is increasingly cast in the role of playground bully — looming over the prostrate form of the global economy and chanting “hike, hike, hike” with malicious glee. US policy rates are rising relentlessly.
 

However, Powell’s public remarks offer little insight into how he expects higher rates to tame inflation. The omission matters as the current policy tightening will have an impact through an unusual route. That is because today’s price inflation is more a product of profits than wages.

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Broad-based inflation is normally a labour-cost problem. The rule of thumb is that labour costs are around 70 per cent of the price of a developed economy’s consumer prices. If wage increases are not offset by greater efficiency or reductions in other costs, the consumer will pay a higher price for the labour they are consuming.

With normal inflation, central banks would need to create spare capacity in labour markets to push wages lower.

Wages have been rising but prices have been rising faster, so real wage growth is catastrophically negative. This is far removed from the 1970s-style wage price spiral; apart from the wage and price control debacle of Richard Nixon’s presidency, US real average earnings rose for much of the decade.

The US restaurant and hotel sector helps explain why wage costs have played a limited role in today’s inflation. Since the end of 2019, the average earnings of a worker in this sector have risen just under 20 per cent. But the number of employees has fallen over 5 per cent. Paying fewer people more money means that the sector’s wage bill has risen roughly 13 per cent. The real output of the sector has risen 7 per cent. So US restaurants and hotels are paying fewer people more money to work harder. The rise in wage costs adjusted for productivity since the end of 2019 is somewhere between 5 and 6 per cent. Restaurant and hotel prices have risen 16 per cent.

This is the current inflation story. Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures.

How is this happening? Two forces have combined. Despite negative real wages, consumers have carried on consuming. Strong post-pandemic household balance sheets have allowed lower savings and increased borrowing to offset the sorry state of real wages. The resulting resilience in demand has given companies the confidence to raise prices faster than costs.

In addition, the power of storytelling has conditioned consumers to accept price rises. Imagine a story about a farmer who takes wheat to the windmill, where it is ground into flour, and then baked into bread. In that fantasy world, a rise in the cost of wheat of say 22 per cent might be used to justify a 15 per cent rise in the price of bread.

TLDR: Financial Times: “Fed should make clear that rising profit margins are spurring inflation

Companies have taken advantage of circumstances to lift prices”

Further analysis- profits driving inflation:

https://www.epi.org/blog/inflation-minimum-wages-and-profits-protecting-low-wage-workers-from-inflation-means-raising-the-minimum-wage/
 

[MC Fresh Breath 4075]

Whether you are pro or anti-Bernie ( I feel he is a lonely voice shouting against the winds) $886 billion for the Pentagon is so ludricious.  

[MC Fresh Breath 4075]

While I'm at it (and this is more lower class than middle, but still):

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Researchers at the University of California-Riverside recently released a study showing poverty is the fourth leading cause of death nationwide. Poverty kills more people than homicide, respiratory disease, gun violence and opioid overdoses, the study showed.

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The minimum wage has been stuck at an unlivable $7.25 an hour under three presidents. Adjusting for inflation, today’s minimum wage is now worth less than at any point since 1956. Nearly a third of the workforce, or 52 million people, earn less than $15 an hour, including 47% of Black workers, 46% of Hispanic workers, 20% of Asian American and Indigenous workers, 40% of working women and 50% of working women of color. Raising the minimum wage to even $15 an hour would lift 7.6 million people – many of whom are women, immigrants, Black, Latinx or parents – out of poverty and give more than 50 million people a raise.

According to the Economic Policy Institute, a worker paid the $7.25 federal minimum wage earns 27.4% less in inflation-adjusted terms than what their counterpart was paid in July 2009 when the minimum wage was last increased, and 40.2% less than a minimum wage worker in February 1968, the historical high point of the minimum wage’s value.

 

https://www.theguardian.com/commentisfree/2023/jul/24/us-federal-minimum-wage-rev-william-barber