Wages, Expectations, and Prospects for Inflation :: Brent Meyer :: Economic Trends :: 05.27.11 :: Federal Reserve Bank of Cleveland

Wages, Expectations, and Prospects for Inflation :: Brent Meyer :: Economic Trends :: 05.27.11 :: Federal Reserve Bank of Cleveland: "Wages, Expectations, and Prospects for Inflation

Brent Meyer

Over the past six months, food and energy prices have risen at an annualized rate of 17 percent, prompting speculation of a possible price-wage spiral that will result in rampant inflation. A wage-price spiral occurs when wage earners start to demand higher nominal wages just to keep up with rising inflation (trying to hold real incomes constant). In turn, these wage increases raise the costs of production, which squeezes margins and induces business owners to raise prices. These even-higher prices then push wage earners to try and negotiate even higher wages, which again prods businesses to raise prices, and so on¦resulting in a rapid run-up in inflation."

Not happening if demand continues to collapse. Check out the graphs.