Wage-Price Spiral

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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 >>
  4. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  5. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
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