The job gains cited in the May 2021 non-farm payrolls release fell well short of what the market had hoped. A fluke? Maybe, but this disappointing jobs report suggests to me that US inflation dynamics are beginning to shift from “demand-pull” to “cost-push” inflation.
The perils of cost-push inflation
Demand-pull inflation is the upward pressure on prices that occurs when aggregate demand outpaces aggregate supply. Cost-push inflation, by contrast, is caused by increased costs for raw materials, wages, and other inputs to production. The latter type of inflation tends to be much more harmful to an economy, as it forces companies to choose from among three distinct (and all undesirable) options:
- Seek to cut their capital costs elsewhere to preserve profit margins
- Invest in productivity-boosting solutions to reduce their labor costs
- Pass their increased costs on to consumers in the form of higher prices
The most probable scenario, in my judgment, is…