John Deere, Inflation Bellwether

"Credit Deere & Co. employees for reading the moment. After a month or so on strike, they won a contract this week that their union negotiators might not have dreamed of a year ago. The episode reveals how inflation is seeping into business decisions and worker demands.

Some 10,000 union workers for the farm-equipment giant approved a labor contract Wednesday, ending a strike that began Oct. 14. The contract includes an $8,500 restart bonus, an immediate 10% raise, two 5% raises and two large bonuses through 2026. Total retirement benefits for an average worker will rise by $270,000.

 

Most important as an economic signal, wages will be adjusted each quarter based on inflation.

 

Deere workers rejected two earlier agreements that their United Auto Workers reps brought for a vote. The original deal offered 5% and 3% raises, which were dwarfed by the 6.2% rise in consumer prices since October 2020. When the negotiation started, the Biden Administration and Federal Reserve said inflation was "transitory." But manufacturing workers read the price signals better than the politicians.

Deere is on pace to have its most profitable year in 2021, despite the drag from supply-chain issues. But the labor agreement will take a big chunk of future earnings, costing north of $3.5 billion. To address workers' fears about long-term living costs, Deere had to offer raises with a looser connection to each worker's expected productivity.

Congrats to the Deere workers, but the alarm bell for the Fed should be the automatic cost-of-living adjustments. Those were a feature of the 1970s economy but faded as inflation was brought under control. The longer inflation stays high today, the more workers will demand COLAs, putting employers on the hook for long-term costs they can't control. Once COLAs are embedded into labor contracts, they become hard to wring out. This is how you get a wage-price spiral and durable inflation." [1]

1. John Deere, Inflation Bellwether
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 19 Nov 2021: A.16.