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What is a Wage–Price Spiral?
A wage–price spiral is an economic process in which rising wages lead to higher prices, which then prompt further wage increases, creating a self-reinforcing cycle of inflation.
Definition
Wage–Price Spiral refers to a feedback loop between wages and prices where higher labour costs push prices upward, and rising prices lead workers to demand higher wages to maintain purchasing power.
Key Takeaways
- Represents a self-reinforcing inflationary cycle.
- Closely linked to inflation expectations and labour market conditions.
- Can sustain inflation even when demand weakens.
- Difficult to break once embedded in the economy.
Understanding the Wage–Price Spiral
A wage–price spiral typically develops when workers and firms expect inflation to persist. Employees negotiate higher wages to keep up with rising living costs, while firms raise prices to offset increased wage expenses.
This dynamic can become entrenched through contracts, indexation, and expectations, allowing inflation to continue without new demand or supply shocks. Tight labour markets, strong unions, or widespread cost-of-living adjustments can intensify the spiral.
Breaking a wage–price spiral often requires credible policy measures to reset expectations, such as sustained monetary tightening or coordinated wage and price controls.
Importance in Business or Economics
- Explains persistence of inflation over time.
- Central to wage negotiations and pricing strategies.
- Influences monetary policy credibility and inflation control.
- Relevant for labour market and cost management decisions.
Types or Variations
- Expectation-Driven Wage–Price Spiral – Sustained by anticipated inflation.
- Contractual Wage–Price Spiral – Embedded in indexed wage agreements.
- Tight-Labour-Market Wage–Price Spiral – Driven by labour shortages.
Related Terms
- Built-In Inflation
- Inflation Expectations
- Phillips Curve
- Monetary Policy
Sources and Further Reading
- Investopedia — Wage–Price Spiral
- International Monetary Fund (IMF) — Inflation Dynamics
- Federal Reserve — Inflation and Labour Markets
Quick Reference
- Wages and prices reinforce each other
- Sustains inflation
- Linked to expectations and labour markets
Frequently Asked Questions (FAQs)
Is a wage–price spiral the same as built-in inflation?
They are closely related; the wage–price spiral is a key mechanism behind built-in inflation.
Can a wage–price spiral occur without strong demand?
Yes. Expectations and labour market dynamics can sustain it even with weak demand.
How do policymakers stop a wage–price spiral?
By restoring credibility through monetary tightening, communication, and sometimes wage agreements.
