So let’s take a step back. What has changed? A secular trend remains in place: aging demographics and a decline in US workforce participation (equivalent to about 5%) that has been consistent since 2000.
Source: Bloomberg as of June 27th 2022
The growth in the global workforce has also slowed and “near shoring” one’s supply chain could further jeopardize the abundance of labor experienced over the last 40 years. An improvement in workforce productivity could save the day and make up for the decline in labor but the trend there is not pointing in the right direction.
Source: BLS, Bloomberg as of June 27th 2022
All this considered, it’s possible we are left with higher structural labor inflation over the longer term. Central banks will have to grapple with this and potentially have a higher terminal policy target rate, raising their target rates and challenging the businesses with a higher cost to borrow. The real estate sector is already experiencing this and it’s evident in the S&P Home Builders’ index decline since the beginning of the year.
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