Tightening labor conditions only affirm KKR’s chief investment officer Henry McVey’s conviction around inflation.  The private equity firm raised its expectations for consumer price inflation and the resting point for U.S. ten-year treasuries. Perhaps more important for dealmakers, the call is based on an assumption that workforce declines are structural and therefore likely to endure.

“Our work suggests that approximately 2.1 million people will not return to the workforce, led primarily by accelerated retirements and lost immigration flows that we think will be difficult to recoup,” reads the private equity firm’s recent note. “These employment trends represent the cornerstone of our thesis about a higher resting heart rate for inflation.”

Covid-induced retirements, discouraged workers, and a decline in immigration continue to put pressure on the labor market. Child and eldercare also remain constrained, forcing would-be workers out of the labor force to help loved ones. These only add to other inflationary catalysts—commodity price and rental growth, among them—to increase KKR’s take on the resting level of inflation in 2022.

That spells the need to invest in infrastructure and real estate to hedge against inflation. And to spend time on operational improvements in the portfolio to reduce or pass along cost increases. Automation and digitalization are already being employed in the retail sector, for example, to control costs. You may recall that even restaurants are digitizing functions once thought indispensable to dining experiences.

Wage inflation is only just beginning, the firm’s take goes, since low wage workers have so far been the only labor segment to see income outstrip the rate of inflation. As mid- to higher-paid workers begin to demand cost-of-living adjustments, wage growth will spiral further.

Brandon Zero