What is a wage-price spiral?

📘 In Brief A wage-price spiral describes a self-reinforcing cycle of rising wages and rising prices. It often begins with higher costs for companies, such as for energy or raw materials, which they pass on to their customers. This makes goods and services more expensive, which reduces workers‘ purchasing power. To maintain their real standard of living, unions demand higher wages, which in turn increase companies‘ production costs. These increased costs lead to further price increases, restarting the cycle. The problem is that inflation and wage demands fuel each other with no end in sight as long as expectations of future price increases remain high. 🔍 Why This Matters A wage-price spiral describes a self-reinforcing cycle of rising wages and rising prices. It is usually triggered by an external price shock, such as in energy or raw materials, which raises the cost of living. Workers then demand higher wages to maintain their real wealth. Companies pass these increased labor costs on to their customers through higher selling prices. This raises the general price level again, prompting new wage demands. The key is whether this process persists or is curbed by productivity gains and stable inflation expectations. 📈 Key Points The wage-price spiral describes a self-reinforcin …