Wage-price spirals are far scarier in theory than in practice

livemint.com:

labour market. That makes wages a lagging, not a leading, indicator for inflation. Adam Shapiro, an economist with the San Francisco Fed, has been even more critical of the wage worries.

In a note in May, he isolated unexpected changes in wages to argue that rising labour costs were only a small driver of non-housing service inflation and a negligible one in broader inflation. Like his Chicago colleagues, he concluded that wage growth was following inflation. None of this means that wage-price spirals are a total myth, which some overeager commentators have written.

As the IMF‘s study noted, serious spirals can occur; it is just that they are extremely unusual. Were inflation to stay very high for a long time, people might start to view fast-rising prices as a basic fact of life and incorporate that assumption into their wage demands. It is possible that this process has begun in Britain.

But in America what is striking about the past two years is how relatively moderate inflation expectations have remained, despite price pressures. In a paper last month for the Brookings Institution, a think-tank, Ben Bernanke, a former chairman of the Fed, and Olivier Blanchard, a former chief economist of the IMF, decomposed the drivers of pandemic-era inflation. They concluded that a triumvirate of shocks (commodity-price spikes, strong demand for goods and supply shortages) accounted for most of the inflation overshoot since 2020.

There was scant evidence that inflation itself had triggered higher wage demands. Wages shot up simply because demand for workers outstripped supply. Wages and prices can be driven up by the same force: excessive spending in the economy compounded by shortages of both products and the workers to produce