Hey There Income Hunter,
Two important events the past couple of days are signs inflation may remain high while growth continues to slow down.
Retail sales initially showed a rise of 0.3% in August, as consumers spent money on new cars and eating out more. (I know I have, and I am stuffed.)
Although adjusted for inflation, retail spending has basically been flat for the past year …
However, government revisions showed that receipts actually fell 0.4% in July instead of being flat as first reported.
The July decline in sales was the first in seven months.
The other news is the ongoing negotiations for unions, which paint a deeper inflation issue.
Today, we’ll take a look at the potential for a wage/price spiral that could spell double-digit inflation in 2023.
Power of Labor is Back
This week, two more rail unions reached tentative agreements with management on new contracts, but the two most important unions, which represent engineers and conductors (and of important players in the train world!) have yet to find a solution.
Engineers and conductors unions represent roughly half of the more than 100,000 unionized workers.
Without them on the job, those trains will not run —nor will many commuter and Amtrak trains that run over freight rail lines.
The potential rail strike planned for Friday (now delayed) has hit the transport sector hard.
Check out the move on Union Pacific …
UNP is a classic economic bellwether …
Notice the technical bearish move over the past few days. Sure, the strike risk hit the stock, but in the bigger picture could the power of the 1960s labor be back?
Inflation traditionally begins with an external shock (war, pandemic, oil embargo, etc), followed by the rise of the power of labor in the form of wage inflation.
Stocks are not priced for a wage/price spiral that would boost labor inflation and hit corporate margins into 2023.
A significant amount of US freight (27%) comes from rails – a strike would be extremely disruptive in the short-term.
A recent Gallup poll did show an increased approval for labor unions …
Bring It Home
This is a very significant development for inflation.
My opinion has been that the Fed will eventually have to give up the inflation fight as higher rates cause systemic risk in the system.
This is an event that can accelerate that process and the critical sign would be 10-year interest rates rising above 3.5% …
That breakout could cause a chain reaction of lower stock prices, acceleration of defaults and further drop in housing.
Bond market stability is absolutely critical for the Fed and they will be forced to do QE either secretly or publically to support the bond market.
Stay tuned for more on that and as always …
Live and Trade With passion My Friend,
Griff