Albert Edwards, the top-ranked market strategist at Societe Generale, said small businesses in the United States may be signaling that consumer prices are going to rise faster. Those pressures will keep the Federal Reserve on course to raise interest rates as a way of hindering rampant inflation.
“The net balance of companies raising wages has surged in recent months and is almost now at a record high,” Edwards said in an April 11 report obtained by Newsmax Finance. “The bottom line is that the Fed will keep tightening almost irrespective of financial market turbulence.”
He cited survey results from the National Federation of Independent Businesses that show small-business owners are having a hard time finding qualified employees — while they’re also raising pay because they feel more confident. This mixture of worry and optimism is a recipe for inflation, Edwards said.
“Wage inflation may well be rising far more quickly than the official numbers suggest and this may yet show up in the official data soon,” he said.
Fed officials at their meeting last month signaled greater confidence in reaching their 2 percent inflation target in the coming year and affirmed plans to continue raising short-term interest rates gradually, according to a report published today.
The central bank monitors inflation data for signs of strengthening consumer demand, but too much inflation means weakened spending power for workers. That eventually leads to declining sales and profits for businesses, a characteristic of a broader recession. The Fed, at least officially, is more concerned about inflation and the jobs market than about stock-market gains.
The NFIB, whose typical member employs 10 people and has sales of about $500,000 a year, has found that its members are now more concerned about finding workers than they are about taxes or regulation – the top worries during the Obama administration.
“Recent results from the U.S. NFIB small company survey indicate extreme optimism, if not euphoria,” Edwards said. For 16 straight months, the NFIB’s small business optimism index has been in the top 5 percent of readings going back 45 years.
“It has been a remarkable 16 months for small business optimism,” the NFIB said. Small businesses have “been so optimistic that they feel confident enough to raise wages.”
Edwards said it’s important to understand the role of small businesses in creating jobs and adding to inflationary pressures. A 2010 study by the Federal Reserve by St. Louis showed that U.S. companies employing fewer than 20 people made up 30 percent of gross job growth from 1992 to 2010.
“The NFIB reports rapidly escalating price pressures, as did the U.S. manufacturing ISM recently,” Edwards said. “Both surveys suggest headline CPI could be pushed sharply higher towards 3 percent.”
The hoarding of labor may indicate that the economic expansion since 2009 is nearing an end, with echoes of the 2000 peak of the dot-com bubble.
“Although the U.S. headline unemployment rate has fallen to only 4 percent, most economists see more labor market slack due to the collapse in the participation rate,” he said. “However, the Conference Board Survey data confirms current labor market tightness as tighter than three out of the last four cyclical peaks. Only 2000 saw a tighter labor market.”
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