The biggest debate in markets right now is whether inflation is transitory or not.
This matters. If inflation goes away, we can go back to low interest rates and soaring growth stocks and a contained bond market.
If it doesn’t – well, we might be looking at a lot more volatility in the likes of the Nasdaq and government bond markets than anyone is used to
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The recruitment business is booming
There’s an interesting stockmarket update from London-listed recruitment company Robert Walters this morning.
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Its trading statement for last quarter notes that the company had a record December, and that profit will be ahead of expectations (the share price is only up about 1.5% or so this morning, so clearly the market already expected it to beat expectations, which is one of the many wonderful paradoxes of markets).
So what’s happened? Recruiters are effectively people brokers. A company wants to find someone, but wants to offload some of the hassle of the actual recruitment process. A recruiter does the stuff in the middle, and hopefully introduces candidates who fit the bill more efficiently than if the company undertook the process itself.
So they make their money when there’s a lot of activity in the job market. And right now, it seems that employers are in a hiring frenzy. “Permanent and interim recruitment activity were the strongest drivers of growth as organisations continued to confidently hire for the longer-term.”
Robert Walters is global, and every single one of its territories saw a big rise in fee income, from China to Japan to Australia to France to the UK, not to mention Latin America.
According to the chief executive – Robert Walters – “we are seeing candidate shortages across all locations and disciplines, a fierce competition for talent and wage inflation kicking in which together create huge opportunities across the recruitment market.”
Inflation isn’t all about Covid
Why did this catch my eye this morning? One of the big debates about the recent bout of inflation we’ve seen has been whether it’s transitory or not.
Central banks have ditched the term “transitory” because it made them look stupid. People thought they meant “short-term”, they say, whereas what they really meant was that the factors driving inflation are all about the pandemic, and that they will go away once the pandemic goes away (I’d argue that they got caught by surprise, but let’s just let them play their word games).
In all fairness to central banks, I can see what they mean. If inflation is basically all about big queues building up at ports around the world mainly because we switched the global economy off and on again in an attempt to thwart Covid transmission (a debate for another day), then, given a bit of time, all those kinks should iron out as the pig passes through the python (as it were).
But that doesn’t seem to be what’s happening. Here are two things which are true in aggregate: 1) companies don’t raise wages unless they have to and 2) companies don’t pass on costs unless they can.
For at least the last two decades, we’ve been in an environment where companies didn’t have to raise wages, but they also struggled to pass on costs. Demographics (cheap young globalised labour) plus disinflation (driven by the internet and tech generally, cheap energy, and the resulting rampant competition) made this world possible.
Capital (those who make their money by owning stuff) benefited at the expense of labour (those who make their money by selling their time).
Are we facing a wage-price spiral?
But something has changed now. It’s very clear that companies are thus far a) willing to pay higher wages where necessary and b) willing to pass those costs onto customers. The latter is only possible because c) customers are willing to pay those costs.
I’m not saying we’re in a wage-price spiral, but one of the defining characteristics of said spiral is that everyone plays an ongoing game of pass-the-parcel. Companies pay higher wages to workers who are also consumers. As consumers, workers can then pay the costs being passed on by companies. Rising costs mean workers demand higher wages. And so on.
You can argue about what is driving this. I would say that Covid has – as it has in many other places – just accelerated a trend that was already in place.
Globalisation (cheap overseas labour and inconsequential transit costs) had already peaked, but Covid travel restrictions have put it into overdrive, while soaring energy costs won’t help either.
Demographics were already turning against the cheap labour argument, but now suddenly the papers are all talking about the fertility crisis like it only just became apparent (my colleague Merryn was ahead of the game, as ever).
In short, I don’t think this is “transitory” or just a kink in the system. I think this is a major shift in the underlying economic environment. And while it’s quite possible that we see a drop in the sheer scale of inflation in the coming months which lulls everyone into a false sense of security, I don’t think that means we can relax.
I’d make sure your portfolio is ready, just in case. For more on all of this make sure you read MoneyWeek magazine every week. Get your first six issues free here.
