Inflation and Stopping the ‘Wage/Price’ Spiral

Inflation and Stopping the ‘Wage/Price’ Spiral

By Katy Brooks, CEO, Bend Chamber

This article originally appeared in The Bulletin on May 21, 2022.

As the worst impacts of COVID-19 wane, businesses are now contending with new challenges, including labor shortages and inflation.

As we have watched inflation rise to a 40-year high of 8.3 percent, the impacts are hitting home for employers and those who work for them in several ways.

One of the most immediate impacts is the escalating cost of supplies and goods. Everything from stocking shelves, filling new car lots and purchasing food for restaurants is costing businesses more. It’s also costing more to have supplies delivered as fuel prices skyrocket and labor shortages hit supply chains.

Add increasing wages to the mix to create another difficult time for businesses to navigate. Inflation cycles are cyclic and not an unknown to business but adding the instability of the past two years makes it more concerning. Even as the economy has begun stabilizing, inflation has made recovery more difficult. Damon Runberg, Oregon Employment Department regional economist, says the length of full recovery may be determined by how long the “wage/price spiral” that is created by escalating costs to both businesses and their employees, continues to spin.

Runberg explains that this economic model is indeed a spiral that starts with rising costs to businesses. Businesses must pass at least some of the costs on to customers. Meanwhile employees who are paying higher prices for food, shelter and goods ask for higher wages. Employers are keenly aware of the labor shortage and in hopes of retaining their employees, increase wages.

This is where the spiral begins its next spin. As wages go up, people spend more. But the goods aren’t as readily available, and they cost even more, thus increasing business costs which requires them to pass that on to customers. Again, employees ask for raises to cover their increasing costs of living, and the cycle continues.

Although there is no silver bullet to stop the spiral, the Federal Reserve’s move to increase interest rates may temper consumer demand enough to slow it down. Theoretically, if that happens the price of goods and services start to stabilize, and people stop needing more raises to compensate. Runberg says the goal is to slow inflation and the wage/price spiral down to a healthy rate thus avoiding the high-speed upward trend.

In the meantime, businesses are struggling and getting creative in order to reduce the spin. Many are securing new supply sources and finding ways to cut back on delivery and fuel costs. They are also grappling for new ways to attract and retain employees by being more responsive to employee needs that are more complex than simply more pay.

Employers are now starting to offer benefits that are meaningful and valuable like childcare and housing stipends, flexible working conditions, work-from-home options, and more time off.

A great local example is what Sunriver decided to do a few weeks ago, announcing they will buy $100 gas cards for all their employees, every month this summer. This increases employment costs, but the investment is more closely linked to the specific problem of increasing fuel costs to people who work for them and often have to drive significant distances to work. With luck, this tactic may increase the probability that Sunriver will retain their labor force.

Other tactics that may reduce the wage/price spiral is for businesses to leverage their growth by borrowing while interest rates are still reasonable. “So far rising interest rates are not slowing short- term capital or equipment investments.” Says Coby Horton, regional president at US Bank, “Many businesses have been through a couple years of hunkering down and keeping their cash.” Now we are seeing investments picking up and businesses expanding.”

Until the cost of borrowing money goes up significantly for businesses, many are taking advantage of still robust consumer appetites. These strategies may help businesses weather the impacts of rising inflation, but the underlying question is whether a recession is coming.

Like most of you, I read a lot about this and see various predictions, many pointing to the affirmative that some sort of recession may be coming soon. We hope for a mild one that might even provide some benefit by stabilizing costs of goods and labor, but it is a specter of which many businesses are wary given our recent economic history. In the meantime, addressing the wage/price spiral is at top of mind for employers as we try to slow the spin and find stable ground.

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