Wage-Price Spiral

DEFINITION of 'Wage-Price Spiral'

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price sprial suggests that rising wages increase disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices.

BREAKING DOWN 'Wage-Price Spiral'

The wage-price spiral is one concept that deals with the causes and consequences of inflation, and it is most popular in Keynesian economic theory. It is also known as the "cost-push" origin of inflation. Another cause of inflation is known as "demand-pull" inflation, which monetary theorists believe originates with the money supply.

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RELATED FAQS
  1. How does wage price spiral impact interest rates?

    A wage-price spiral occurs when wages and prices rise in tandem in a self-perpetuating cycle that exerts inflationary pressure ... Read Full Answer >>
  2. What are the advantages and disadvantages of a wage price spiral?

    The wage price spiral, also known as a kind of cost-push inflation, was a popular economic theory between 1940 and 1975 to ... Read Full Answer >>
  3. What can governments do to stop or slow a wage price spiral?

    A wage-price spiral is an economic cycle in which rising wages increase consumer demand, causing prices to rise. Rising prices ... Read Full Answer >>
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