Thread by @bauhiniacapital

A subject worthwhile thinking about. A DM group discussed this a few days ago (chart h/t to 🔒) where I suggested the combo was a setup for the Fed raising rates faster/sooner than people think.

The timing is right. There is more buffer in place than people think.

Higher oil & commod prices, higher average wages, more benefits, higher rates, etc should all help dampen ProfitMargin/GDP, but it starts from a very high place. And the UER from a relatively low place (given the history in the 70s where inflation and slightly higher rates and

costs meant higher nominal GDP, and lower-trending labor share of GDP), and given the recent quit rate we are seeing, and the labor mobility rates, room is being made to shift people up the curve in many places, and to absorb more labor at the lowest income brackets.

All this said, that first chart of labor share of GDP appears ENORMOUSLY goosed by a barbell of covid stimpacks and the tax code changes. If one were to look at the change by bracket and remove covid transfers, it would look remarkably different. There are, however, changes as

seen in recent moves by large-employers (min-wage level increases).

To me, the "benefit" of raising rates faster is that the marginal spot cost of energy, container shipping, etc, as well as higher vax rates seeing more out-of-home activity will (in my opinion) drop off, and

that will dampen inflationary tendencies (mitigating some of the "cost" to margins of hiking rates), while if demand pull is so strong that such costs do NOT fall back, not hiking would have been a mistake and hikes will come faster and furiouser.

As I said in the DM group, I think that not enough people on fintwit have studied (much less experienced) situations where demand pull caused inflation and how far Fed Funds moved to offset that.

The Fed research staff has, and Fed governors are often old enough to remember.