- The longer inflation stays hot, the higher risk workers will demand more pay.
- That could lead firms to raise prices, kicking off a “wage-price spiral” and keep inflation high.
- The IMF says risks of that are low, but some economists aren’t so sure. Some say one’s already here.
Good news: wages are expected to continue rising. Bad news: wages are expected to continue rising.
How much wage increases are contributing to four-decade high inflation could determine whether we’re seeing what economists call a “wage-price spiral” and could help unlock how high inflation may climb and how long it will stick around.
The question is so key that the International Monetary Fund devoted an entire chapter to unpacking the answer in its World Economic Outlook this month.
A wage-price spiral is when higher prices lead workers to demand higher wages, which in turn increases costs and pushes prices still higher, setting off a loop.
In the second quarter, wages accelerated 5.1% annually, below the inflation rate but the fastest clip since the series began in the first quarter of 2002.
The IMF concluded risks were low, but some economists believe the U.S. is either already in a spiral or entering one as people chase inflation higher.
“Every month inflation remains high, the risk grows that inflation expectations… move higher too,” Henry Allen, Deutsche Bank analyst, said. “In turn, firms and individuals will factor this into their price-setting and wage-bargaining, and…
