## Energy Shocks Amid Rapid Inflation Could Fuel Faster Wage Gains

_IMF Blog, September 12, 2022_

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**Canonical URL:** [Energy Shocks Amid Rapid Inflation Could Fuel Faster Wage Gains](https://www.imf.org/en/blogs/articles/2022/09/12/cotw-energy-shocks-amid-rapid-inflation-could-fuel-faster-wage-gains)

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## Bibliographic details
- Authors: Chikako Baba, Jaewoo Lee
- Published: September 12, 2022

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### Overview
- High oil and energy prices raise costs for consumers directly (fuel, airfare) and indirectly (higher prices for goods), eroding purchasing power and prompting workers to seek higher wages.
- These wage responses to energy price shocks are examples of "second-round effects" that can feed back into higher overall prices and potentially create a wage-price spiral if large and sustained.
- Study basis: analysis of 39 European countries.

### Empirical findings (Chart of the Week)
- When overall inflation is already high, wages tend to rise more in response to an oil price shock.
- Quantified effect: wages increase by 0.4 percent one year after a 10 percent increase in oil prices when underlying inflation is higher than 4 percent.
- By comparison, wages increase by less than 0.2 percent one year after a 10 percent increase in oil prices when underlying inflation is not higher than 4 percent.
- The difference in wage response between high- and low-inflation periods narrows in the second year.
- Even in high-inflation environments, wages tended to stabilize after a year rather than continuing to rise steadily, implying a rise in the wage level but not a continued increase in wage inflation.

### Mechanisms and interpretation
- Higher underlying inflation may make people more alert to price increases and more likely to demand compensation for energy-driven cost increases.
- Larger second-round effects increase the risk of a sustained feedback loop between wages and prices, which could raise inflation expectations and prolong inflationary pressures.

### Policy implications and recommendations
- Because oil price shocks can fuel persistent rises in inflation and inflation expectations if second-round effects are large and sustained, a monetary policy response is required to counter this risk.
- Central banks need to respond firmly to head off the risk of sizable second-round effects leading to a sustained increase in inflation.
- If central banks remain adequately vigilant, current high inflation could cause higher-than-usual compensation for the cost of living without necessarily morphing into a sustained increase in inflation.

*Chikako Baba and Jaewoo Lee — September 12, 2022*

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## References

- [second-round effects](https://www.imf.org/en/Publications/WP/Issues/2022/09/06/Second-Round-Effects-of-Oil-Price-Shocks-Implications-for-Europes-Inflation-Outlook-523201)
- [Chart of the Week](https://www.imf.org/en/News/Chart-of-the-week)

_Source: https://www.imf.org/en/blogs/articles/2022/09/12/cotw-energy-shocks-amid-rapid-inflation-could-fuel-faster-wage-gains_