Definition
Wage-Price Spiral
A wage-price spiral is a self-reinforcing cycle where rising prices push workers to demand higher wages, which raises business costs and prices further.
When inflation erodes purchasing power, workers seek pay rises; firms pass higher labour costs into prices; that fresh inflation prompts new wage demands, a spiral that can entrench high inflation.
Central banks fear spirals because they make inflation persistent and hard to tame without a painful slowdown. Keeping inflation expectations anchored breaks the loop. India's relatively flexible, largely informal labour market makes classic spirals less automatic but not impossible.
Related terms
- StagflationStagflation is the rare and painful combination of stagnant growth, high unemployment and high inflation occurring at the same time — a mix that leaves policymakers with no easy fix.
- Phillips CurveThe Phillips curve describes an inverse short-run relationship between unemployment and inflation: lower unemployment tends to come with higher inflation, and vice versa.
- Inflation ExpectationsInflation expectations are what households, firms and markets believe future inflation will be, a powerful and partly self-fulfilling driver of actual inflation that central banks watch closely.
- InflationInflation is the rate at which the general level of prices rises over time, steadily eroding the purchasing power of money and the real value of savings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.