Wherever Bob Humphreys looks, things are getting more expensive.
The chief executive of Delta Apparel, a Greenville, S.C., clothing maker, sees higher costs at every link in a multinational supply chain: Raw materials, such as cotton; energy to run his factories; transportation to move his goods to market — all are getting pricier. With higher wages looming, he’s passing on some of those extra costs by raising prices on Delta Apparel’s plain and decorated T-shirts and fleeces.
“Clearly, there is inflation in the apparel delivery system right now,” Humphreys told investors on a recent call. “So there’s definitely cost increases coming.”
That’s exactly what spooked Wall Street this week, triggering a brief stock market rout that shaved roughly 9 percent off the Dow Jones industrial average’s record high. A pair of recent government reports showing that American workers were finally enjoying sustained pay raises convinced many on Wall Street that the economy — for the first time in a long time — was in danger of overheating.
“We are at the beginning of what’s likely to be sustained wage growth. The labor market has been tight for quite a while,” said Stephen Stanley, chief economist of Amherst Pierpont.
Higher wages are good news for millions of American workers who have endured years of meager salary increases. But investors see fatter paychecks as the start of something ominous: rising prices that may cause the Federal Reserve to end a decade of easy money policies even more quickly than planned and threaten stock values.
On Tuesday, the market yo-yoed nearly 1,200 points before closing up 567 points, or 2.3 percent. The wild two-day ride left some investors convinced that further declines are in the offing.
“The market tanked because it was bubbling out of control. And it is still bubbled,” said Daniel Alpert, managing partner of Westwood Capital.
The Fed kept interest rates near zero for seven years and flooded the economy with trillions of dollars in cash in the wake of the Great Recession. That encouraged investors to move into stocks, driving share prices higher.
For the past two years, the Fed has been raising rates in tiny increments. Last fall, it began reversing its asset-buying program, which had injected all that extra cash into the markets. Before the recent wage news, investors expected the nation’s central bank to raise rates three times this year on top of a trio of increases in 2017.
“We’re finally starting to see that [wage] acceleration,” said economist Michael Strain of the American Enterprise Institute. “That changes the dynamic. That means the Fed needs to be more concerned about inflation than it has in the past.”
Higher inflation would cause the Fed to raise rates more quickly. It also would eat into the fixed returns that bonds offer, prompting investors to demand higher yields to hold them. As the returns on bonds grew more attractive, some investors would quit the stock market, causing share prices to sag, Strain said.
Stock investors wouldn’t like that, but getting interest rates and bond yields up from their unusually low levels would be a sign that the economy is getting back to normal, he added. “In my view, this is not bad,” he said.
After being stuck below its 2 percent target for nearly a decade, the Fed’s preferred inflation gauge has ticked higher for four consecutive months. Some products have become noticeably more expensive over the past year: Fuel oil is up 15 percent, eggs are up almost 12 percent, and hospital services are up 5.1 percent.
Delta Apparel, where rising costs contributed to a net loss of nearly $10 million on sales of $90.3 million in the quarter ended Dec. 30, isn’t the only company paying more for what it needs.
Home builder PulteGroup is seeing higher prices for land, lumber and concrete. Weyerhauser is trying to escape rising rail freight costs by moving wood shipments to trucks. At Clorox, profit margins are being squeezed by rising commodity and logistics costs, prompting the consumer-goods-maker to raise prices on items such as disinfecting wipes.
“We’re continuing to incur a lot of labor and material costs. We’re seeing increases. Not all of that are we able to pass on to the consumer,” PulteGroup chief executive Ryan Marshall told investors last month.
Still, in a nearly $20 trillion economy, individual anecdotes can be misleading. For every product that is getting more expensive, there is another, such as clocks or audio equipment, whose prices are running in reverse. Across the economy, overall inflation remains subdued, up just 1.5 percent over the past year.
The Fed has spent much of the past year puzzling over the absence of rising wages and inflation. In early 2017, prices rose at nearly a 2 percent annual clip, cheering central bank mandarins who see that level as a sign of a healthy economy.
But by the fall, inflation had weakened again. The softer wage-and-prices outlook came even as businesses reported that they needed to offer higher wages to attract workers, with the unemployment rate nearing 4 percent.
“It’s been a persistent mystery for many years: How we could have unemployment fall six percentage points and not see a significant acceleration in wage growth,” said Strain, a former Fed economist.
Fed experts identified several possible explanations, including one-time price declines for services such as wireless phone contracts, the rise of online shopping and the failure of traditional unemployment measures to accurately capture labor market slack.
Janet L. Yellen, then in her final months as Federal Reserve Board chair, predicted that inflation would resume climbing. She appears to have been correct, though it has some way to go before it hits the Fed’s target.
As job growth continues to eat into the shrinking ranks of the unemployed, Stanley said he expects annual wage growth to top 3 percent this year. That’s a level not seen since 2009.
Whether that will translate into higher inflation depends on the reason for those pay gains, he said. If workers are rewarded for being more productive — perhaps aided by new equipment or smarter management techniques — then fatter paychecks won’t be inflationary.
But if employers raise wages simply because of a shrinking pool of job candidates, then prices will tick up as well. “The key question is, are we seeing progress in productivity growth?” he said.
Whatever the wages outlook, no one expects a return to the double-digit inflation rates of the 1970s and 1980s.
For one thing, it’s not yet clear that the recent wage growth will last. Paul Ashworth, an economist with Capital Economics, said the uptick that spooked markets this week may simply have been a statistical distortion caused by unseasonably cold January weather.
“We expect earnings to be almost unchanged in February,” he said in a research note.