The message is getting through to consumers. One Fort Worth Star-Telegram reader wrote to the editor, “You wanted higher wages and products made in America?” You should accept inflation, she stated. “You requested an increase in minimum wage. This led to an overall rise in pay. This has resulted in a pay increase that is passed on to the consumers.

While corporations might point fingers at rising wages, economic data shows that inflation is not caused primarily by wage growth. Today’s fastest-growing prices — furniture, fuel and cars — are not due to rising wages but other factors such as a shortage of goods or companies padding their profit margins. It has been obvious for a long time that the relationship between what workers make and what consumers pay is tenuous.

Inflation is highest in the labor-scarce sectors

If prices were driven by higher wages, then it would follow that the most labor-intensive services sectors of the economy will see the greatest rise in consumer prices. The inflation picture shows that prices for goods are increasing faster than those for services, by three.

Julia Pollak, labor economist at ZipRecruiter said that goods prices are the main driver for inflation. “Wages have not been the main driver for inflation so far.” Inflation was initially higher in less labor-intensive industries.

 

The Consumer Price Index has shown that the most labor-intensive items — such as eating out and personal service, which includes beauty salons and barbershops — have seen a 6.2% and 4.7% increase, respectively, from one year ago.

“Both those numbers are still below 7.5% inflation, and there are other categories seeing much higher price rises — gasoline prices. Housing, furniture,” stated Daniel MacDonald of California State University at San Bernardino, economics chair. “The reason prices are rising is not because of the fact that wages are increasing for oil production in the U.S. It’s all about the oil markets and housing markets.

Why have gas prices risen?

Since last year, the price of energy has skyrocketed with natural gas and heating oil all rising sharply. Ryan Sweet, senior director for economic research at Moody’s Analytics, stated that this adds about 2 percentage points overall inflation.

CPI for utilities, electricity and gasoline are all directly affected by higher energy prices. However, it can also be seen in other prices that you and I pay. He said that businesses must transport their goods and will try to pass higher transportation costs onto customers and employees.

In 2020s, 1960s economics

It is believed that consumer prices and worker wages are interrelated and that raising one will immediately lead to the dreaded “wage spiral” of ever-increasing expenses. This belief dates back to the mid-20th Century, when the U.S. economy was vastly different. Major business sectors were regulated, one third of the workforce was unionized, globalization hadn’t yet begun and companies couldn’t repurchase their stock.

According to Josh Bivens (research director at the left-leaning Economic Policy Institute), workers in such an economy were able bargain for higher wages and labor costs rose with them.

However, since the 1980s, the relationship between labor costs, and other costs, has been severed.

“It’s certainly not that workers would not like to be able earn higher wages due to rising prices pressures but instead, a number of developments–mostly driven by intentional policy choices–have sapped workers bargaining power in labor markets for decades,” Bivens wrote last week.

Jonathan Millar, a Barclays analyst, said that it is nearly impossible to determine the relationship between inflation and wages. “The link is often weaker than laypeople might believe. It turns out, even during the pandemic, prices didn’t keep up with wages.

 

In general, consumers benefited from the absence of a wage/inflation relationship. Broad-based wage increases such as minimum wage increases didn’t result in higher prices. Co-author of a 2016 study about minimum wage increases, California State University’s MacDonald found that a 10% increase in pay would only result in a 0.4% rise in consumer prices.

He said, “We’re talking here about the cost for a $5 cheeseburger going up to $5.04 — that’s very, very low.”

Cheeseburgers, just like gas, are a category in which minor price increases can be very attractive to shoppers.

“There are some goods and services that consumers are particularly aware of, and they are more likely to notice when prices rise.” People tend to internalize the price of items at Chipotle or McDonalds very quickly,” stated Millar from Barclays.

What is really driving up the prices?

Why are consumers paying more for everything, from food and rent, if wages are not the main reason why prices have soared? Companies tend to hide one key fact: Higher corporate profits.

According to the U.S. Commerce Department, corporate after-tax profits have increased to record levels in the last year despite the severe economic downturn caused by the pandemic.

“Higher prices are a sign that someone is making more money. Bivens explained that it was employers in supply-constrained sectors, such as shipping and oil producers, who have been able to collect the additional revenue from higher prices over the past year.

Some corporate leaders are open about their plans for passing on higher supply-chain prices to consumers. Procter & Gamble, Colgate-Palmolive and Unilever, all giants in consumer goods, have been able raise prices without losing sales. According to the Wall Street Journal, nearly two-thirds of publicly traded businesses report higher profit margins than they did before the pandemic.

Surveys from Salary.com as well as the Conference Board have shown that corporations plan to increase their pay by 3% to 3.9% over the next year, which is less than half of the inflation rate.

According to ZipRecruiter’s Pollak, “Many companies have seen their total payrolls barely move at all.” Pandemic retirements have caused “they’ve lost their most skilled, highest-paid people and replaced them by a younger group.”

Even if companies increase salaries significantly, they might still be ahead if they get more labor from that person. Pollak stated that the productivity rise we are seeing due to more work at home means that labor costs can remain pretty stable.

For now, however, it is unlikely that higher wages will be a factor in higher profits.