Good morning. A week of records, none good. The US blue-chip Dow Jones Index had its worst half year since the Cuban Missile Crisis. Copper, Bitcoin and the ASX all won wooden spoons for torrid quarters. Your guess is as good as mine about what happens next. Comments and opinion to the usual place: Thanks to everyone who got in touch after last week.


Wages are back in the spotlight. Talking heads are sparring over the risk of a 1970s-style wage price spiral in Australia. Then, a merry-go-round of rising prices and wages kept inflation high for years. It took double-digit interest rates and mass unemployment to bring down. Nobody wants a repeat.

But is one likely?

The Fair Work Commission’s decision to hike the minimum wage by 5.2% or $40 a week sparked the latest debate. Business leaders and some in the media warned workers contemplating a raise they risked stoking inflation and ultimately, raising unemployment. A pay rise today means the dole queue tomorrow, in other words.

Australian Council of Trade Unions Secretary Sally McManus rubbished the claims as “a boomer fantasy”, arguing emaciated unions couldn’t spark a wage-price spiral if they tried. The industrial relations system that lifted wages in lockstep with inflation is decades dead, echoed Ross Gittins in the Sydney Morning Herald.

The debate is playing out across the world. The central bank for central banks, the Bank for International Settlements, warned earlier this week that containing inflation requires averting a wage-price spiral. It worries one may be underway – for example, a third of Spanish collective bargaining contracts struck in the first three months of 2022 were indexed to inflation.

Investors are watching closely because high inflation and weak growth torch profits. The S&P 500 managed -4% annually between 1972 and 1981 after adjusting for inflation. Bond returns were also miserable. Here’s how Bloomberg’s Tracy Alloway put it in a conversation with legendary short-seller Jim Chanos:

“Your entire reputation as an investor is going to come down to whether you get the inflation call right, because that's going to change everything in markets.”

Should investors be concerned Australia is on the verge of 1970s inflationary spiral? It’s unlikely.

Enter a paper from the famously-radical US Federal Reserve. The authors attempt to explain why inflation was dormant in the decades before the pandemic. Instead of clever central bank policymaking, they credit the demise of organised labour. Cowed workers take what bosses offer, cutting wage growth and inflation off at the root, so the argument goes.

Labour and capital are constantly jostling for a greater share of the economic pie, describe the authors. Businesses through mark ups and margin, labour via higher wages. Inflation spills over when both sides demand portions larger than the economy can provide. The authors approvingly quote Nobel Prize winner James Tobin:

“Inflation is the symptom of deep-rooted social and economic contradiction and conflict … The major economic groups are claiming pieces of pie that together exceed the whole pie. Inflation is the way that their claims, so far as they are expressed in nominal terms, are temporarily reconciled. But it will continue and indeed accelerate so long as the basic conflicts of real claims and real power continue.”

If class war drives inflation, investors can relax. The war is won. Fewer protections at home and the offshoring Sword of Damocles overhead means little chance of a wage revolution. Militant unions live mostly in the imagination of the Liberal Party. From roughly half the workforce in 1986, union membership has shrunk to just under 15%, concentrated in the public service.

That’s not to say today’s record number of job openings won’t translate into pay rises for millions of workers. The streets are thick with striking teachers and nurses. NSW rail workers won a $260 million concession from the government this week. But one swallow does not make a summer. Spirals require institutional accelerants. Few exist (for now). Inflation should begin to come down of its own accord as borders reopen and supply chains heal. It will get a helping hand from higher rates and falling real incomes.

It’s a rare day that US Federal Reserve researchers and the Australian Council of Trade Unions sing from the same hymn book. Time to listen.

More from Morningstar

Catch up on what happened this week in the usual place.

Superannuation turned thirty this week and Morningstar’s Christine St Anne explored how the industry is changing to handle aging members. And then there was the census, Graham Hand has you covered.

After the worst quarter since the pandemic, Australian stocks are starting to look undervalued, says Morningstar analysts. Other market watchers are bracing for more pain, with a series of earnings downgrades expected. As always, those willing (and able) to take the long view are rewarded.

Finally, our colleagues in Asia explored how Chinese equities may buffer investors nursing heavy losses elsewhere. So far, so good. China’s SSE Composite Index is down 6.7% this year, outperforming Australia, the US and Europe.