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What will push inflation higher?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The biggest cost for most companies is the cost of labor. In a developed economy, about 70% of total costs come from employing workers. That means about 70% of inflation will come from labor.

This is why labor costs matter to markets. Japan's "shunto" pay round, recent German pay settlements, and the US employment report all give signals of labor cost pressures. Labor costs link to inflation, inflation links to central bank policy, and so investors look closely at the numbers.

Labor costs are a bit more than wages. Some US companies have made bonus payments to get people to join them. Rising self-employment means that some labor costs do not appear as wages. And in working out a company's labor costs, we have to take into account how hard workers are working (productivity). The best companies have workers who work harder, and can afford to pay their workers more money without raising their costs. 

In many key economies, healthy labor markets are now leading to higher labor costs. Labor cost pressures should slowly add to inflation – at least where market forces drive prices. Measures like the US personal consumer inflation deflator will start to reflect this.