Wage inflation has arrived in a big way and Jamie Dimon says CEOs 'shouldn't be crybabies about it'

cnbc.com:

In this article

Banks have been one of the main beneficiaries of high inflation recently because their profit margins tend to expand when higher prices force central banks to raise interest rates.

At least, that was the thinking as investors bid up bank shares while rates climbed and inflation reached multi-decade highs. Now, megabanks including JPMorgan Chase and Citigroup are disclosing that hot inflation in one area — employee wages — is casting a shadow over the next few years.

Shares of JPMorgan fell more than 6% on Friday after the bank said that expenses will climb 8% to roughly $77 billion this year, driven by wage inflation and technology investments. Higher expenses will likely push the bank's returns in 2022 and 2023 below recent results and the lender's 17% return-on-capital target, according to CFO Jeremy Barnum.

«We've seen a somewhat elevated attrition and a very dynamic labor market, as the rest of the economy is seeing,» Barnum said. «It is true that labor markets are tight, that there's a little bit of labor inflation, and it's important for us to attract and retain the best talent and pay competitively.»

The development adds nuance to the bull case for owning banks, which typically outperform other sectors in rising-rate environments. While economists expect the Federal Reserve to raise rates three or four times this year, boosting the finance industry, there is the risk that runaway inflation could actually wipe out those gains, according to Barnum.

«On balance, a modest inflation that leads to higher rates is good for us,» the CFO told analysts in a conference call. «But under some scenarios, elevated inflationary pressures on expenses could more than offset the rates benefit.»

Citigroup CFO Mark