May 2022 – Spiraling Out of Control – Wages and Prices

Unless you’ve been hiding in your basement for the last couple of months (understandable if you were), you’ve probably heard about the dreaded Wage-Price Spiral (WPS) that many economists are predicting.

A WPS can occur when prices rise, causing workers to demand higher wages.  Companies then raise prices again to cover their now-higher wage expense – which causes workers to demand even higher wages to keep up.  This is a state of affairs almost guaranteed to end in tears, as it did in the US in the 1970s.  A never-ending loop that results in no real gain for workers, companies, or consumers.

As a business leader, you’d better brush up on your Econ 101 and hold on to your seats because we may actually be in a WPS now as workers demand higher wages and salaries to keep up with the largest price increases since 1981.  And just to add gasoline to the flames, interest rates have been near zero for two years, supply chains are close to breaking, and labor shortages have given workers unusually high bargaining-power.

But it’s hard to make sense of the spirograph of data, and other economists are confident that we’re not in a WPS, nor will we be in one anytime soon – and that includes the US Federal Reserve.  Those are enough spirals to make one dizzy…

And how would we go about fixing a WPS if it does happen?  That job falls to the central banks, and the Fed is actively working on it by aggressively raising interest rates (in spite of not seeing signs of a WPS), hopefully without strangling growth.

The bottom line is that no one knows if a WPS is coming soon, but even your basement might not be safe if it does.