A Potential U.S. Rail Strike Is Bad News For Inflation

A Potential U.s. Rail Strike Is Bad News For Inflation
Rahul Nayak

The Federal Reserve has spent most of 2022 trying to fix the U.S. inflation problem, a task made more difficult by Russia’s invasion of Ukraine. While the Fed can raise interest rates, it can’t lower the price of oil.

It also can’t operate trains.

The latest obstacle to normal inflation is a simmering labor conflict between U.S. railroad companies and their unions.

The Biden administration brokered a tentative deal between management and labor back in September, but most of the unions haven’t signed off on the deal. One organization that represents workers who build and maintain railroad tracks recently rejected the new arrangement.

If the two sides cannot work out a more durable deal and a protracted work stoppage ensues, then U.S. companies will face huge problems shipping and receiving the goods they need to run their operations. That’s bad news for the inflation fight.

“[I]f it lasts for a while, then it would represent another supply shock to the economy,” said Wells Fargo Securities chief economist Jay Bryson. “That is, it would cause prices to rise further while weighing on economic activity.”

While a worse-case scenario is certainly possible—with plenty of attendant supply chain disruptions—the rail strike situation is still a long way from reaching a boiling point.

Rail Strikes and Inflation

The potential U.S. rail strike is a classic labor dispute: Workers want better pay and benefits, while management wants to employ fewer workers and get more hours from the ones they retain.

The main point of contention is attendance rules and time off. Rail employees are demanding the right to have reasonable sick days and time off, and they don’t want to be penalized for taking days to care for loved ones.

President Biden deputized his Labor Secretary Marty Walsh to mediate the dispute, and a preliminary agreement was reached, allowing roughly 90,000 railroad workers to avoid going on strike. In a sign of how close we got to a strike, Amtrak had canceled all long-haul service in anticipation of a work stoppage.

The stakes were enormous. Failure to broker a deal would mean that roughly 7,000 long-distance freight trains would stop running, which could reduce economic output by $2 billion daily, per an industry report.

But on Oct. 10, members of the Brotherhood of Maintenance of Way Employees Division of the Teamsters Union (BMWED), which represents more than 11,000 workers, rejected the deal. Another seven unions are in the process of ratifying the deal, while four have already agreed to terms.

The decision by BMWED won’t result in an immediate stoppage; rather they’ll keep working at least until mid-November to allow for further negotiations.

Supply Chain Problems in Focus

A strike, especially in the middle of the holidays, would exacerbate historically high rates of U.S. inflation.

Recall that supply chain problems were one major reason prices started climbing higher in 2021. Goods were stuck in ports, or not being manufactured at all, due to a combination of surging consumer demand and continued Covid-19 outbreaks in countries such as Taiwan and China.

Shortages of in-demand goods help push up prices throughout the economy, in a process that economists describe as cost-push inflation.

Recently, the price of goods has been coming down as the global supply chain problems were gradually being worked out and nations learned to live with Covid-19.

Here are two key areas of concern: food and energy.

“[A] rail strike would pose a large impediment to the movement of both grain and required fertilizers for fall applications, after harvest,” said Pete Meyer, head of grains and oilseeds analytics, S&P Global Commodity Insights.

With about 70% of U.S. produced ethanol shipped by rail, and ethanol making up roughly 10% of U.S. gas volume, a train strike could cause gas prices to rise.

What Would the Fed Do about a Rail Strike?

While the Fed will surely monitor the situation, it’s unlikely to bother the Federal Open Market Committee (FOMC) when it meets in November.

In any case, the central bank will likely raise the federal funds rate by another 75 basis points, especially after the recent inflation report showed dramatically higher shelter and food prices.

Market participants believe the Fed will keep raising interest rates throughout the year, with a more than 87% chance rates rise by at least another 1.25 percentage point, according to the CME FedWatch tool.

Should a strike occur, and linger for a while, the Fed might find itself in a familiar tough spot.

“The Fed’s policy toolkit is not well suited to respond to supply shocks,” Bryson said. That would result in continued rate hikes, and continued quantitative tightening.

What a Rail Strike Means for You

There are two places a potential strike—plus higher inflation—could bite: your budget and your investments.

Consumers have had nearly 18 months of sky-high inflation to cope with. Should a strike put yet more pressure on prices, Durham, NC-based certified financial planner David Peters recommends those in and near retirement to focus on the basics.

“For a lot of older clients, I recommend a hard look at their budget, the same thing we’ve been doing all year,” said Peters. “Ask yourself: do I really need to pull money out of my portfolio to buy this?”

That’s why building up a substantial cash reserve—up to about one year’s worth of spending—is a good idea. You might need it to afford food and rising utilities prices.

Continued high inflation would put even more pressure on stocks, since consumers would have less money to spend elsewhere.

Stocks dropped bigly after the most recent consumer price index (CPI) report, as investors believed the Fed would continue its hawkish policy to put a lid on inflation. So far this year, equities have fallen more than 24%, the worst year for stocks since 2008.

Life has almost been as rough for bond investors: Vanguard Total Bond Market ETF (BND), for instance, is down 15%.

If a strike-induced inflationary spike occurs on top of already high prices, the Fed will simply raise rates higher for longer, putting a strain on your investment portfolio. Of course, such falls are part of a long-term investing strategy, but can be tough to manage in the moment.

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