Fading Inflation? Here Comes a Wage-Price Spiral, BCA Says

This too shall pass. That has been the line from the Federal Reserve and the White House about surging inflation lately, with the Consumer Price Index (CPI) jumping 6.2% year-over-year last month. Now worker pay has started to escalate, which to some is a sign threatening the wage-price spiral that dogged the 1970s.

“Consumer price pressures in the US are becoming broad-based and wages are accelerating,” wrote Peter Berezin, research director at BCA Research. “Hence, inflation in the US will prove to be not so transitory.”

For the 12-month period ending in September, wages and salaries climbed 4.2%, according to the US Bureau of Labor Statistics. In the leisure and hospitality sector, previously devastated by the pandemic and now opening up (or trying to), the increase was even more pronounced, at 7.6%. This is a labor-intensive area, with pay a large component of costs. McDonald’s, for instance, has jacked up compensation 15% lately, in a bid to entice scarce workers. No surprise that restaurant prices are up 6.8% over the past six months.

To Berezin, the wage-price escalation will enjoy a short-lived respite as surging consumer demand for goods eases and supply-chain disruptions unsnarl, before the spiral kicks in again. “US inflation should dip over the next six to nine months,” he predicted. The path of wage inflation, he said, is a “two steps up, one step down trajectory of higher highs and higher lows.”

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After that, it’s back to the inflation express. “The respite from inflation will not last long, however,” he cautioned. At this stage, he pointed out, the bulk of the wage growth has been at the bottom end of the income ladder. “Wage growth will broaden over the course of 2022, setting the scene for a price-wage spiral in 2023,” he added.

Berezin has little faith in the Federal Reserve to boost interest rates soon, in an effort to quell swelling inflation. “We doubt that either fiscal or monetary policy will tighten fast enough to prevent such a spiral from emerging,” he said. As a result, US inflation will surprise meaningfully on the upside. Right now, futures markets and Fed hints suggest that no rate hikes will occur before mid-year 2022.

Of course, not everyone agrees with the BCA strategist. Mark Zandi, chief economist at Moody’s Analytics, wrote in an opinion piece for CNN that “this uncomfortably high inflation isn’t here to stay.” By his assessment, “as Delta fades and workers get healthy and return to work, the acute labor shortages and outsize pay increases will end, which means higher prices will, too.”

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Tags: BCa Research, CPI, Federal Reserve, Inflation, leisure and hospitality, Mark Zandi, McDonalds, Moody’s Analytics, Peter Berezin, wage-price spiral

Hedge funds have seen a lot of ups and downs in the past few months. According to Citco’s recent report, the company’s hedge fund clients delivered an overall weighted average return of 1.15% in the third quarter of 2021, compared with weighted average returns of 6% in the second quarter and 8.25% in the first quarter.

The Q3 downturn seemed to come primarily from less impressive returns in July and September, according the HFRI index, which compiles data on the performance of all hedge funds with at least $50 million under management. Funds with more than $10 million in assets under management (AUM) and at least 12 months of active performance are also tracked in the index.

However, October’s numbers seemed more promising, with both the fund-weighted HFRI and asset-weighted HFRI showing approximately 1.4% returns.

Don Steinbrugge, chairman of Agecroft Partners, a consulting firm that focuses on hedge funds, said the reason for the relatively lackluster Q3 performance was overall mediocre performance among stocks and bonds. “Big global equity markets were down, with the S&P down 0.6%,” he said. “And the fixed-income markets were flat. Therefore, the industry didn’t get the data tailwind.”

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In the past five years, there has been a growing divergence between the performances of larger and smaller hedge funds, and that trend seems to be continuing this year. For 2021, the HFRI, the leading hedge fund performance index, is showing a significant gap between its asset-weighted index—which is weighted according to the AUM reported by each fund for the prior month—and its fund-weighted index—which includes all single-manager HFRI index constituents. The data through October shows the asset-weighted index logging an annualized return of 7.7%, while the fund-weighted index has seen returns of 11.22%. The gap was even larger in 2020, when the asset-weighted index returned only 2.19% while the fund-weighted index returned 11.83%.

Steinbrugge said he believes many of the larger hedge funds are struggling because they have difficulty optimizing such vast portfolios.

“Many have grown their assets well beyond the optimal size to maximize performance,” he said. “And, as a result, their alpha is diluted over a large asset base, which has negatively impacted performance.”