## Wage-Price Spiral Risks Still Contained, Latest Data Suggests

_IMF Blog, February 24, 2023_

## Source details

**Canonical URL:** [Wage-Price Spiral Risks Still Contained, Latest Data Suggests](https://www.imf.org/en/blogs/articles/2023/02/24/wage-price-spiral-risks-still-contained-latest-data-suggests)

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## Bibliographic details
- Authors: Jorge-Alvarez, Niels-Jakob-Hansen
- Published: February 24, 2023

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### Overview
- 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.

### Historical analysis and key findings
- 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.

### Implications and outlook
- 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.

### Policy observations and scenarios
- 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.*

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## References

- [paper](https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073)
- [World Economic Outlook](https://www.imf.org/en/Blogs/Articles/2022/10/05/wage-price-spiral-risks-appear-contained-despite-high-inflation)
- [Jorge A. Alvarez](https://www.imf.org/en/Blogs/authors?author=Jorge-Alvarez)
- [John Bluedorn](https://www.imf.org/en/Blogs/authors?author=John+Bluedorn)
- [Niels-Jakob H. Hansen](https://www.imf.org/en/Blogs/authors?author=Niels-Jakob-Hansen)
- [Youyou Huang](https://www.imf.org/en/Publications/Publications-By-Author?author=Youyou+Huang&name=Youyou+Huang)
- [Evgenia Pugacheva](https://www.imf.org/en/Blogs/authors?author=Evgenia+Pugacheva)
- [Alexandre Sollaci](https://www.imf.org/en/Blogs/authors?author=Alexandre+Balduino+Sollaci)

_Source: https://www.imf.org/en/blogs/articles/2023/02/24/wage-price-spiral-risks-still-contained-latest-data-suggests_