It may already feel normal to walk into a store and see the “Help Wanted” sign on the door. Or you may have gone to your favorite restaurant one evening and found it closed, with an apologetic “Sorry, we couldn’t open tonight for lack of staff” note pasted somewhere.

America is suffering from a labor shortage.

While this may be an inconvenience in our everyday lives, our first question should be how the ongoing labor shortage might affect monetary policy and financial markets. The second question should be how it might affect our financial and retirement planning.

True causes of the labor shortage: what factors drive it?

Ask anyone what’s causing the labor shortage, and they’ll point to the extra $300 per week that’s been added to unemployment insurance payments. Companies trying to staff up this year to meet pent-up consumer demand have had trouble hiring. That difficulty has triggered higher wages, hiring bonuses and even bonuses for showing up for interviews.

The theory is that lower-wage workers are earning more by staying home (between unemployment pay and the $300 add-on) than by working. And that may explain part of the shortages. But investors may be disappointed if they think ending the $300-per-week stipend – possibly in September – will resolve the problem.

Workers, in general, are undoubtedly taking advantage of the high demand; they’re holding out for better, safer jobs and larger paychecks. As a result, by June 2021, the labor report confirmed more job openings than unemployed workers.

Health issues could be a factor. Where the number of Covid cases drop and restrictions loosen, labor shortages ease somewhat, too. If the Delta variant fades in September, we will see if better virus statistics motivate the unemployed to venture out.

And when children go back to in-school learning in September, we’ll see if working parents who left the workforce to care for their children will return to work.

If the labor situation does move closer to normal, then the shortage will have been transitory. But if it continues beyond that, then it could be more structural. And that would justify making the labor shortage a factor in your planning.

Is the labor shortage structural?

Structural labor shortages can have ramifications for inflation and economic growth. Those, in turn, could affect the timing and pace of the Federal Reserve tightening monetary policy, for example.

So, let’s look at its structure.

A U.S. Chamber of Commerce report, “The America Works Report: Quantifying the Nation’s Workforce Crisis” (dated June 1, 2021), looks at the Worker Availability Ratio. This ratio compares the number of available workers to the number of job openings. Over the past 20 years, the ratio has averaged 2.8 workers for every job opening, but the ratio has recently dropped to 1.4.

In a U.S. Chamber survey of local chambers and industry associations, 90% reported “lack of available workers” as the main factor slowing their local economy. “Covid-19 issues” came in a distant second, at 45%.

Other surveys point to the difficulty in finding enough “qualified” workers to fill jobs, indicating a mismatch between available workers and required skills. An overwhelming 83% of the surveyed businesses said hiring was either “harder” or “significantly harder” than five years ago.

The labor shortage appears structural.

How can a labor shortage affect the economy?

A labor shortage can affect an economy in countless ways. Let’s look at the major ones.

Supply chain disruption – Labor shortages are the primary cause of supply chain disruptions. They affect the entire supply chain, starting with a lack of factory labor, then insufficient truck drivers, warehouse workers in distribution centers, local delivery drivers and retail salespeople.

Today we pay for the tight labor market with pervasive shortages of goods and services. In the future, we will pay for these shortages in the form of inflation.

Inflation – Inflation is the rate at which prices for goods and services increase in an economy. Prices rise when the money supply increases relative to the size of the economy through excess government spending or central bank money printing. Events that raise production costs or disrupt the production of goods also push up prices. (Too many dollars chasing not enough goods.) Inflated prices of inputs into goods and services will also raise the prices of final goods and services.

Today’s excess government spending and money printing could lead to inflation, despite the Federal Reserve’s claim that it will only be transitory. And the supply chain disruption caused by the global pandemic will continue to raise production costs.

GDP – High inflation pushes consumers’ purchasing power down as their dollars can buy less and less. If wages don’t keep up, basic living costs will consume more of their available money, and consumers will reduce their spending.

Inflation makes forecasting harder, which leads to uncertainty. Businesses hold back on hiring decisions in the face of rising costs for labor and materials, and consumers spend less. The result is slower economic growth.

Markets – Higher inflation can be positive for stock markets if the higher revenues outpace the growth of expenses and result in greater profits. But eventually, too much inflation can be detrimental. As costs grow for non-discretionary items (rent and food, for example), the demand for discretionary goods falls.

The impact of inflation on bond markets is also a factor. Bond market watchers are looking for clues of the Federal Reserve’s intentions to dial back its bond purchases. This act will be seen as the first step that could then lead to higher interest rates.

Monetary policy – The central bank tries to target an annual inflation rate of 2%. However, the year-over-year inflation rates in recent months have been nearly three times that much.

The method most used by the Federal Reserve to influence and contain inflation is the federal funds rate (the interest rate one bank charges another for overnight borrowing). A higher fed funds rate trickles down to borrowing costs for businesses and consumers alike. Borrowing becomes more expensive. Economic growth and demand fall, and inflation goes down.

However, increased interest rates have direct consequences for financial markets.

How can inflation affect your retirement portfolio?

It is essential to understand the contents of your retirement portfolio to know which assets are at risk and which are not.

Assets with fixed, long-term cash flows are likely to perform poorly in inflationary times as their future cash flows’ purchasing power falls over time. Conversely, commodities and assets with adjustable cash flows are more likely to perform better with increased inflation.

In general terms, in inflationary times, money held in savings will shrink. Interest payments from fixed-income securities (such as treasuries, bonds, and CDs with fixed interest rates until maturity) will lose purchasing power. Some categories of stocks tend to hold up relatively well. Commodities and real estate (real assets) usually align with inflation.

In short, labor shortages – that were initially seen as an inconvenience – could present a threat to your retirement portfolio. It makes sense to keep a watchful eye.

This article originally appeared in Old Colony Memorial.