What is a Wage Price spiral?
Investment updates • 3 min read
What is a Wage Price spiral?
Manika Premsingh
Inflation is at multi-decade highs. In the UK, it reached 9.1% in May, the highest level seen since 1982. A cost of living crisis is at hand. The stock markets are volatile. And discontent among people is starting to show clearly.
Consider the rail strikes underway in the UK. The National Union for Rail, Maritime and Transport workers, more popularly called RMT, for instance, is dissatisfied with the 2% wage increase proposed by the Network Rail, a public body of the Department of Transport that operates railway networks across Great Britain. This is way below their demand of a minimum 7% rise. They are also protesting job cuts in the offing. As far as pay rises go, the government reportedly fears that big pay rises will send the already out of control inflation levels soaring even further.
And this is where the wage price spiral comes in.
What is a wage-price spiral?
As prices rise, pay hikes are demanded. If these pay increases are agreed to, inflation can rise even further. This is because higher incomes can increase consumption, allowing companies to raise prices. Wages are also a cost for companies. As their costs rise, companies might have to pass on the increases to their customers. As inflation rises even more, another round of pay increases could come in, resulting in what is called the wage-price spiral.
Is the wage-price spiral a real risk?
The concept has been around for a long time. A 1937 New York Times article referred to it in the context of a strike at US Steel. More recently, it came back in vogue in the 1970s, when inflation in the UK spiralled up to over 20% levels.
Far from making us pessimistic, however, these experiences should make us hopeful. If not for the immediate future, then for the medium term.
The Bank of England, for instance, expects inflation to fall to half its current levels by the end of next year. It is further expected to return closer to its target inflation rate of 2% in the year after. Even if its forecasts don’t play out perfectly, we can still expect some decline in inflation over time.
Latest reports say that China driven supply chain issues are beginning to improve as the country comes out of lockdowns. OPEC and other oil producers have agreed to increase oil production too. These developments could well bring inflation down from its current levels, reducing the risk of a wage-price spiral.
What does this mean for our stock market investments?
There is no sugar coating the impact of high inflation on our investments. It is already visible on stock market movements and the sluggish economy. But if inflation eases sooner rather than later, we can hope for better times. In any case, both the stock markets and the economy can be incredibly resilient. And in the long-term they have rewarded investors. It quite literally pays to stay invested through the rough times.
