Rising Inflation: Shock Or Trend?

Is Inflation on the Rise a One-Time Event or a Long-Term Trend?
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Is the recent increase in inflation an indication of a shift in the trend? Or is it just a minor jolt to the system? Let’s look at inflation through the prism of the labor market to see if we can answer these issues. Getting Down to Business With Money
Assume you’ve been working at a job for a while and are getting annual raises that keep up with inflation. So far, everything has gone well. Then one day you get a call from a recruiter about a new work opportunity. The employer is providing a considerable raise in salary as well as a signing bonus. Does this imply that you’ll be making more in the future?
Given the signing bonus and increased salary, you will almost surely see a considerable increase in income in the first year. You may earn more money each year in the future, but only because of the difference in your income, as the signing bonus was a one-time occurrence. However, this presents an important question: Did you include future salary increases in your agreement—raises that are higher than inflation? The majority of folks do not. The goal of most wage and benefit negotiations is to maximize the initial salary and benefits, with the idea that future raises will be in line with inflation or the market. In other words, the increase in purchasing power that you will experience due to inflation is a one-time deal. In subsequent years of employment, it will not be repeated. The raise represents a (positive) shock to your real income rather than a shift in the trend.
Finding a Balance
That scenario is eerily similar to where workers are at the moment. The economy as a whole is in the same boat. We received a one-time payout in the form of stimulus checks and increased unemployment benefits as a result of the pandemic. These payments’ benefits have run out and will not be renewed. Many workers are now searching for a raise, either because they are changing employment or because their employers are increasing wages to retain them. Workers are currently attempting to obtain as much as possible. Companies are attempting to pay as little as they believe they can. The balance of these elements will decide how much of a boost the economy will receive as a whole. That isn’t to say that the same thing will happen next year, or the year after that.
Consider that for a moment. There will be no need for disruptive shocks if the economy is back in balance, with the labor market and everything else. Wages will return to equilibrium as job seekers find new positions and workers return to the labor market to fill the vacancies. Employers will have enough labor, therefore workers won’t be able to obtain new employment at much greater pay in the future.
ADDITIONAL INFORMATION FOR YOU
Is it a trend or a shock?
Of course, labor market equilibrium is contingent on a sufficient number of workers being available. This situation appears to be likely in the immediate run. Longer term, continuing equilibrium appears unlikely, which could lead to a systemic push for higher salaries. This is a possibility, but not in the near future.
That one-time bonus (in stimulus and benefits) and the one-time rise (as individuals gain new employment) will boost demand in the short term. We’re experiencing inflation as a result of this increasing demand. That is exactly what we are experiencing right now. However, once the one-time bump has passed, this scenario will not necessarily change the trend in inflation. Inflation in the labor market and elsewhere is currently a shock that will pass. Wages will be maintained at a higher but consistent level. Longer term, we may see a shift in the trend, but we aren’t there yet./nRead More