Clueless punditry on inflation and the stock market


As the stock market has sold off for a whole week, we are being told that there is a great deal of concern over stoking inflation because wages are rising faster than they have since 2008. Is that really bad news after being stagnant for years?

It appears to me that many commentators need a lesson on what does and what doesn’t cause inflation.

If companies are using savings from taxes to pay higher wages, bonuses and benefits to workers, that would not be inflationary because overall there are not new expenses.

If sales are going up and profits are going up and the marginal cost of additional wages does not reduce gross margins, that does not cause inflation at all. As a factory goes from 70% utilization to 75% or higher utilization because of higher sales and higher demand, that normally lowers inflationary pressures because the fixed costs of the factory are spread over more units of sales. Basically, productivity rises.

Using tax savings to build new factories and pay additional workers is not inflationary in itself as long as gross margins don’t decrease.

What does cause inflation and is very damaging to an economy is when a government adds taxes, fees, and mandates on companies when sales are not going up and the economy is stagnant. This would be known as cost-push inflation.

A couple examples:

If politicians demand that companies raise the minimum wage from $10 to $15 while sales and the economy are stagnant, the company has to raise its prices, which is hard in a flat economy. Most businesses do not have exceptionally high profit margins, and if they don’t have new volume to absorb the additional cost, they either have to raise prices or fire employees. On a mass scale, both could lead to huge problems for the economy.

If the government and politicians continue to add regulations and compliance costs on all businesses, such as Obamacare, the companies have to either raise their prices, hire fewer workers, give lower bonuses, or a combination of all of the above. If there is a very slow economy (Obama's eight years) while stacking on mandates and regulations that raise non-productive compliance costs, it is very damaging, which would be called stagflation.

Stock markets and commodity prices rise and fall just like temperatures, storm activity, and sea levels. Rising wages need not cause inflation if they are accompanied by rising economic growth, lower taxes and fewer regulations. Let’s hope the government doesn’t screw this up by overreacting to wages that may start to catch up.

It is good if businesses take in more money, which drives more efficiency and productivity for businesses. That money will trickle down (progressives deride this process) throughout the economy --  including to the government in the form of higher tax receipts. 

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