Will Wages And Prices Spin Out Of Control?

When I was a kid, one of my favorite toys was a top. For younger viewers, a top is a spheroid with a point at the bottom. You wind a string around it, unfurl it quickly, and it spins…like a top. If my description leaves you confused, this YouTube video shows a live demonstration.

The world’s labor markets are beginning to generate a spiral of a different kind. Wages and prices have been rising briskly in tandem, initiating a feedback loop that could make temporary inflation more permanent. This is a risk that bears close watching.

Labor shortages are widespread. Demand for workers has mushroomed as economies have reopened, but the pandemic is still limiting labor supply. Record fractions of American workers are quitting their jobs for better ones (and better paying ones). The result is wages which are escalating at their highest rate in many years.

WEC 11-24-21 - • Will Wages And Prices Spin Out Of Control? Chart

To pay those wages and preserve profit margins, companies are pushing through price increases. Prior to the pandemic, consumers were resistant to such efforts, but today, they seem willing to pay. Measures of corporate pricing power are at multiyear highs.

As the prices of goods and services go up, workers will want their pay to keep pace. Employees will raise their wage demands to sustain purchasing power. If companies pass those higher labor costs to customers, the process begins all over again.

In this fashion, a feedback loop between wages and prices can become entrenched. Once it starts, it can be hard to arrest. A wage/price spiral was one of the drivers of the high inflation rates seen in Western countries a generation ago, and it took painful policy forces to slow it down.