We apologize, but this video didn't load.
Click here to see other videos from our team. Sustained wage-price spirals are rare, according to the International Monetary Fund. In an analysis chapter released on Wednesday from the IMF's forthcoming World Economic Outlook, the fund said that wage and price hike dynamics in 2020 and 2021 were driven by unusual COVID 19 pandemic shocks, unlike previous episodes that were reacted to more conventional economic forces.
The IMF researchers looked at 22 episodes of high inflation and falling real wages in advanced economies over the past 50 years and found most subsided quickly. Production capacity and labour supply shocks drove price hikes up largely due to the rise of private savings and the release of pent-up demand, the IMF said. The IMF said that past inflationary episodes usually ended as nominal wages slowly caught up with prices over several quarters, avoiding an upward spiral. Economic shocks were viewed as temporary, leading wages and prices to stabilize based on normal labour supply dynamics.
The chapter noted a few key exceptions, including the U.S. stagflation era that followed the 1973 OPEC oil embargo, when nominal wages failed to increase with prices and further oil shocks in 1979 kept inflation high and real wages falling. This trajectory changed only when the Federal Reserve raised interest rates sharply, leading to years of recession in the early 1980s. Indexing of wages to cost-of-living increases in Belgium helped fuel a major wage-price spiral in the 1970s, with wage inflation sometimes exceeding price gains, the IMF said. After the end of Second World War rationing in the United States unleashed massive pent-up demand for scarce consumer goods, it spurred double-digit wage and price gains for years until industry was fully adjusted to peacetime production and excess demand by 1949.
The historical evidence suggests that episodes characterized by about a year of accelerating prices and wages have not generally lasted, with nominal wage growth and price inflation tending to stabilize after several quarters, the IMF said.