Why People and Prices are So Sticky and What to do about it

Imagine this. You know you are talented and can get a higher-paying job somewhere else, but you don’t. You want to stay with your current employer because the devil you know is much better than the devil you don’t know, and you have credibility, clout and relationships that would take a long time to replicate at a new company.

Next, the pandemic hits, and business owners are freaking out. The world is coming to an end. After a few very bad sleepless nights, business owners cut pay, fire people and forego their own salaries to slash costs amid all the uncertainty.

But then the U.S. government steps in and rescues the situation by providing Paycheck Protection Program (PPP) money to millions of businesses. The stock market bottoms and rebounds in a blink of an eye. We get a vaccine in record time and now society is reopening.

As an employee you know your boss accepted PPP money, you know business is back, so why hasn’t he raised your wages back to where they were pre-pandemic? Because he doesn’t have to...

This is why prices and people are so sticky, and why we will have pockets of inflation. I know the typic of inflation and jobs is an old one, but it shows us something about how human behavior works and where there are investable ideas and themes.

Inflation is not transitory when it comes to commodities and a branded company like Starbucks. Let’s say Starbucks is facing higher coffee bean prices (up ~ 50%) because of supply chain disruptions and droughts. Starbucks will easily increase the price of a cup of coffee to offset its higher commodity costs. When the prices of coffee beans go back down, Starbucks will probably keep the price right where it is and won’t adjust back down.

Starbucks’s margins expand and investors and owners are happy because the company makes more money when commodity prices fall. This means that prices are sticky. A price increase because of higher commodity prices is great for companies and for investing when you have pricing power and what goes up must come down.

Now let’s look at the supply side of the equation. If there is too much supply of something, then the price will come down. It might seem contrary, but the cure for high prices is high prices. If there are too many coffee beans and not enough folks drinking that coffee, the price of the commodity will go down.

But let’s talk about labor. In some cases, labor is like a commodity. A lot of people probably can work at Starbucks and it's a nice place to work and they offer benefits, so let's assume there is high competition for a job at Starbucks. People who can't demand higher wages for what they do because what they provide as a service is a commodity with lots of other willing candidates who also want to do that job.

While Starbucks is facing higher coffee bean prices and will increase the price of coffee to offset the higher raw material price, the company can't justify paying its workers more because there are plenty of people who are competing for that job and would take that job at lower wages.

So branded players can keep their prices high after commodity prices fall and if the company has a strong culture, workers won’t leave their current employer for a higher paying job somewhere else.

Branded companies with strong cultures take advantage of commodities on both sides of the equation: raise prices and keep wage costs low. Similarly, if you are a talented employee, you should demand a raise because you are unique in what you do while everyone else is common.

Of course, alternatively if you don’t want to change jobs because of benefits, location, and work friends, you have two options when it comes to inflation and higher commodity prices: invest in your career so you can take the risk to demand a pay raise, or invest in equities that benefit from the rise in inflation.

Which would you rather do? If you would welcome some guidance, give me a call and let’s talk.

Disclaimer: I am using Starbucks as an example of supply and demand and am not recommending Starbucks, nor am I invested in Starbucks.

16 views0 comments