Inflation and the Profit-Price Spiral

Planet Money

NPR

Business, News

4.6 • 29.8K Ratings

🗓️ 12 May 2023

⏱️ 27 minutes

🔗️ Recording | iTunes | RSS

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Summary

Economists say that inflation is just too much money chasing too few goods.

But something else can make inflation stick around.

If you think of the 1970s, the last time the U.S. had really high sustained inflation, a big concern was rising wages. Prices for goods and services were high. Workers expected prices to be even higher next year, so they asked for pay raises to keep up. But then companies had to raise their prices more. And then workers asked for raises again. This the so-called wage-price spiral.

So when prices started getting high again in 2021, economists and the U.S. Federal Reserve again worried that wage increases would become a big problem. But, it seems like the wage-price spiral hasn't happened. In fact wages, on average, have not kept up with inflation.

There are now concerns about a totally different kind of spiral: a profit-price spiral. On today's show, why some economists are looking at inflation in a new light.

This episode was produced by Sam Yellowhorse Kesler and engineered by Katherine Silva, with help from Josh Newell. It was fact-checked by Sierra Juarez and edited by Jess Jiang.

Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.

Transcript

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0:00.0	This is Planet Money from NPR.
0:06.7	Inflation for a lot of us might just feel like prices going up on us, right?
0:12.8	But there is something that like kicks off inflation, that gets the inflation train going.
0:18.6	Economists say it is too much demand chasing too little supply.
0:23.8	Too much money, not enough things to buy.
0:26.5	But something else can make inflation stick around.
0:30.8	If you think of the 1970s, which was the last time the United States had really high sustained inflation,
0:37.1	a big concern was rising wages.
0:40.4	Yeah, prices for goods and services were high.
0:43.0	And workers, maybe expecting prices to be even higher next year,
0:47.5	asked for pay raises to keep up.
0:50.9	But then companies had to just raise their prices more to cover the new labor cause.
0:55.8	And then workers asked for raises again, and it all like spiraled out of control, which is why it is appropriately called the wage price spiral.
1:04.8	It's pretty good name.
1:06.0	Pretty darn good name.
1:07.6	And when inflation started getting bad in 2021,
1:11.8	economists in the US Federal Reserve worried that wage increases would be a big problem.
1:17.6	There was the same concern in Europe.
1:19.2	In Germany, the UK, the head of the UK Central Bank actually said last year
1:24.3	that workers should restrain themselves from asking for big wage increases
1:29.0	because inflation could get, quote, out of control.
1:32.9	But it seems like a 1970 style wage price spiral hasn't happened.
	...

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