Back to Basics
Ringing in the new year, inflation, interest rates, and jobs will be the key global factors for 2023’s market outlook. Our initial focus will be on an aspect of inflation. The Federal Reserve’s definition of Inflation “is the increase in the prices of goods and services over time.” Inflation cannot be measured by an increase in the cost of one product, service, or even several products or services. Instead, inflation is a general increase in the overall price level of the goods and services in the economy. Inflation is a measure of the end reaction. The catalyst is the basis of a number of fundamental inputs, including monetary policy, supply-demand, prices of goods and services, productivity, and cost of labor, to name a few. The causality dilemma between wage inflation and rising hourly wages at the rate of inflation to maintain the cost of living is a major basis input to rising inflation. As illustrated by select major states, minimum wages such as CA, FL, IL, and NJ have been rising at rates well above the rate of inflation. The rise in labor costs eventually has to be absorbed by increased prices of goods and services; hence, inflation. As that broad market attempts to battle prices of goods and services by addressing supply and consumer demand, another effect of the Fed monetary policy, unless state policymakers moderate rising minimum wages, is to control labor costs by employment supply and demand – an increase in unemployment.