Abstract

An assessment of the dynamics of Wage-price Spiral inflation and its self-reinforcing nature has been discussed in this paper. It is a feedback mechanism, where Wages and prices continually keep pushing each other upwards: wage earners seek higher wages to maintain their purchasing power amid growing price levels, and in response price setters increase the price levels to keep up with the elevated costs. This recurring sequence further heightens the inflationary pressure, as the continuous adjustments create a perpetual loop of rising wages and prices.

This paper is also focused on exploring the relationship between wage increase and inflation in the Indian context. Through empirical evidence, this study analyses the observed inflation trends in India, seeking to understand the dynamics of the existing inflationary patterns and the impact caused by the pandemic, how it disrupted the supply chains, labour markets and consumer behaviour. Through a detailed investigation, it seeks to unveil the ways these changes have influenced and altered the relationship between wage increase and the price level, influencing the spiral.

This paper tries to critically analyse the interventions and reforms done by the government in the past to manage inflation and wage growth. An assessment is done of its effectiveness and applicability, pinpointing where improvements can be considered, the recommendations are put forward in the existing policies considering the changing dynamics and potential ways to resolve the spiral

Introduction 

Wage push inflation is an overall rise in the cost of goods and services that results from a rise in wages. This triggers a wage-price spiral eventually as the cost of producing goods and services goes up as companies pay their employees more. Companies must charge more for their goods and services to maintain the same level of profitability to make up for the increase in cost . This idea shows a relationship of causation and effect in which a change in one factor influences the other. Thus, creating a continuous cycle. As the demand for an increase in wages prevails by the workers, it leads to a rise in disposable income availing them of more purchasing power. Thereby, leading to a boost in demand for goods and services which puts pressure on businesses to produce more to meet the escalated consumer needs. The resultant escalation in demand allows businesses to raise their prices, which happens due to limited supply constraints in the short run. 

They can do this as the consumers are willing to pay more due to their higher disposable income. Consequently, leading to an upsurge in inflationary pressure as the overall cost of goods and services in the economy rises.  As prices go up, workers may find their current wages not stretching as much, prompting them to demand an increase to sustain their standard of living. Henceforth, businesses face higher production costs because of the increment in wages which they have to pay to accommodate the heightened demand. This reciprocating behaviour where rising wages trigger higher prices, and higher prices, again lead to a growth in demand for higher wages, establishing a theoretical vortex or spiral. This spiral lingers on as each factor influences and reinforces the other.

To summarise, the wage-price spiral majorly accentuates the interwoven link of wages and prices in an economy. It clarifies how changes in one element like rising prices spark off a sequence of events like workers then demanding higher wages that, in turn, impact the other, starting a self-perpetuating loop with repercussions for inflationary trends.

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