I’d seen some version of this graph (AHE, average hourly earnings, as a proxy for cost, vs PCE, core price index, as a proxy for revenue) with the spread being reflective of a “wages growth will eat all the margin” narrative, making its way through broker notes in my inbox.
Although the logic is very straightforward it didn’t map all that well to what margins actually did over time.
May well still be right (in implication) and could well be I’ve misinterpreted how the bolts are meant to fit together (although the wording in the notes is very clear).
I suppose it is undeniable in an “all else equal” type frame (if costs grow quicker than revenues what else is there as a conclusion, and I use the same observation/comment myself as a “key market risk”) so perhaps my graph is either a) pointless, as in “missing the point” or b) the proxies are not reasonable proxies.
A note that I am not sure how to end. It is fine to say wages growth outstripping revenue growth will pressure margins, and, if not priced in, that would be a bad thing for markets. I guess I’ll leave it at that, which is something we probably all agree with anyway.
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