Wage-Price Spiral Risks Still Contained, Latest Data Suggests

IMF Blog, February 24, 2023

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Persistent wage and price growth in the latest data may raise concern about a "wage-price spiral"—an outcome in which wages and prices feed on each other and accelerate over a sustained period, risking rising inflation and unanchored expectations.
The analysis updates earlier work highlighted in a paper and chapter of the October 2022 World Economic Outlook and extends the sample through the third quarter of last year.
The study examines a rich set of advanced economies going back to the first quarter of 1960 for some countries.

The study searched for historical episodes similar to the post-pandemic recovery dynamics in advanced economies.
Only a few past episodes with similar dynamics were followed by wage-price spirals, defined as sustained periods of both price and nominal wage accelerations.
In most historical cases:
- Nominal wages caught up while inflation ticked down over several quarters.
- Inflation-adjusted (real) wages gradually recovered.
- A sustained acceleration of both wages and prices was rare.
For the median economy in the sample, plotting recent wage and price inflation up to the third quarter of 2022 shows:
- Inflation last year rose more than during the sample of past episodes.
- Nominal wage growth has failed to keep up.
- As a result, real wages have decreased in most advanced economies in the sample.
Unemployment rates remained stable or fell in most countries as labor demand picked up after the pandemic-induced pause.
Tighter labor markets have coincided with nominal wage growth increases in most of the world; however, nominal wage growth has not been abnormally above what would be expected based on historical experience.

Conclusion: wage-price spiral risks still appear contained.
Historical evidence suggests a plausible forward path:
- Increases in nominal wage growth can occur alongside a deceleration in consumer prices.
- This pattern would allow real wages to start growing again and recover some of the purchasing power lost last year.
- History indicates that such a recovery in real wage growth would not by itself signal the start of a wage-price spiral.
Monetary policy tightening followed most of the past episodes and helped keep inflation contained.

Observed policy reaction historically:
- Monetary policy tightening was a common response following past episodes with similar dynamics and contributed to containing inflation.
Scenario consistent with historical average:
- Nominal wage growth may remain elevated or pick up even while inflation declines, supporting a recovery in real wages without necessarily triggering a wage-price spiral.

—This blog reflects research by Jorge A. Alvarez, John Bluedorn, Niels-Jakob H. Hansen, Youyou Huang, Evgenia Pugacheva and Alexandre Sollaci.