Wage inflation depicts the rise of goods and service prices as a result of wage growth. In other words, the higher salary people get, the more they have to pay for products and different services. It means that employers tend to maintain corporate profits in the face of the salary growth.
That is why they charge more for the services and goods they provide. As a result, people will need even higher wages to compensate for the difference between the price rise and salary they get.
Today, we will learn more about minimum wage inflation as well as why investors should consider this factor.
Wages and inflation have a direct correlation. At the same time, if we plan to spend more money considering rising prices, we need to get it somewhere. The majority of people generate salaries from their jobs. The higher salary they get, the more they are afraid of losing their positions. Besides, the majority of small businesses and service providers drastically depend on wage earners as the main target audience.
On the other hand, with a growing number of unemployed people, the population is less willing to maintain higher product and service costs as they simply have nothing to pay for the same products.
Every time you see prices going up, it is normal that you expect your salary to also go up to cover the rising costs. The situation creates more room for the salary inflation to show up. It occurs in the form of a spiral. Economists say it bridges hyperinflation with uncontrolled inflation. We actually see a degrading situation with employers rising prices and employees seeking higher salaries. It all moves in a circle eventually resulting in wage inflation.
Rising prices are generally absorbed by the economy due to a combination of employees having a decreasing purchasing power on the one side and businesses making lower real profits on the other. This is where central banks are the ones to react and take actions once the wage growth has been spotted. The main mission of central banks here is to prevent the chain reactions and spiral movement of growing prices and wages.
Initially, central banks raise interest rates to control wage inflation. As a result, both consumers and businesses find it difficult to allocate extra capital to lower the demand. However, this concept only works in theory, as it has never been tested under real-market conditions.
In reality, central bankers tend to establish specific policies aimed at longer timeframes. It is not that easy for them to make adjustments to the existing wage ecosystem. On the one hand, it will definitely affect the market, making it shake at some point.
On the other hand, it can even imply additional risks for investors. That is why central banks are mainly focused on utilizing long-term measures and precautions to keep wage inflation under control and achieve desired price stability.
Traders can track the changes in the wage price. This data comes behind a lagging indicator that represents employment rate. In other words, if you observe wage inflation, it also means other types of inflation also take place.
At this point, investors should realize that regulators are ready to tolerate inflation at its starting phases, as they are not eager to make urgent moves that can bring even greater risks. However, they will not ease the situation once the sign of wage inflation has been spotted.
Investors should carefully track news to know if central banks are about to tighten the situation. Always listen to what official regulators say about wage inflation.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.