inflationary spiral

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inflationary spiral


price-wage spiral

a self-sustained increase in the rate of INFLATION brought about by the interaction of rising final prices and rising input costs. For example, an initial sharp increase in the prices of goods and services caused by an increase in raw material costs can lead to a demand for higher MONEY WAGES by trade unions concerned to protect their members’ living standards. If conceded, higher wage costs are soon likely to prompt manufacturers to put up their prices in order to maintain profit margins. The higher prices in turn produce further demand for wage increases, and so on. Once under way, price-cost increases tend to be self-reinforcing and are exacerbated by EXPECTATIONS of even further increases (see ANTICIPATED INFLATION). See ADAPTIVE EXPECTATIONS, EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE, MONEY ILLUSION, REAL WAGES.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
The acceleration in inflation during 1991 was largely due to increases in indirect taxes and user fees required to correct structural budget imbalances and reduce subsidies, but it was followed by a pick up in the growth of wages, which raised fears of a price-wage spiral. The new central agreement on wage moderation, combined with the slowdown of the economy, the appreciation of the guilder and the VAT-rate cut in October 1992, has allayed such fears and should secure the ongoing process of disinflation.
Howard Archer, chief economist at Global Insight, said: "Sustained, heightened inflation expectations would be liable to adversely affect the behaviour of price and wage setters, thereby increasing the risk of a very damaging price-wage spiral developing.
Tight monetary conditions are expected to prevent a price-wage spiral due to the hike in the price level by 1 1/2 percentage points resulting from the introduction of a value-added tax in 1995.
In any case, with accelerating inflation and the risk of a price-wage spiral, a relaxation of monetary policy would be inappropriate.

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