Wage-price spiral
Also called: Built-in inflation · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
A wage-price spiral is a cycle in which rising prices and rising wages keep pushing each other up. When prices rise, workers ask for higher wages to protect what their pay can buy. Higher wages raise firms' costs, so firms raise prices again, and the cycle repeats. It matters because a one-time price rise can turn into lasting inflation. It is a form of cost-push inflation, which is inflation caused by rising costs rather than by extra demand.
Example
Suppose a big rise in crude oil prices lifts the prices of transport and food. Workers then demand higher wages to keep up. Factories pass the higher wage bill on to buyers through higher prices, and workers soon ask for another raise.
Don't confuse with
- Demand-pull inflation: here prices rise because total demand outruns supply ("too much money chasing too few goods"). In a wage-price spiral, prices rise because costs keep going up.
- Greedflation: here firms raise prices by more than their costs have risen, to earn bigger profits. In a wage-price spiral, prices rise to cover higher wage costs.
Related concepts
- Demand-pull inflation
- Output gap
- Cost-push inflation
- Supply shock
- Imported inflation
- Greedflation
- Structural inflation
- Inflation expectations
- Anchoring of inflation expectations