1. WAGE PRICE SPIRAL
FED TAPERING

2. Understanding wage price spiral

3. WAGE PRICE SPIRAL
Inflation is on the headlines, day in and day out. It is giving the government, industry and the common man sleepless nights.
RBI has raised interest rates 18 times in a row

4. WAGE PRICE SPIRAL
It is also being said that inflation is now getting deep seated.
What does this mean?
Let’s understand.

5. WAGE PRICE SPIRAL
Inflation is of two types.
1) Supply led inflation and
2) Demand led inflation.

6. WAGE PRICE SPIRAL
Simplistically put for taming “Supply” led inflation the solution is to increase the supply of goods in the system while for “Demand” led inflation the solution is in “raising interest rates”.

7. WAGE PRICE SPIRAL
While increasing production would require a higher lead time,
increasing interest rates can be implemented relatively faster.

8. WAGE PRICE SPIRAL
However we have seen now that despite of several rate hikes, inflation doesn’t seem to come down satisfactorily.

9. WAGE PRICE SPIRAL
So what does one do?

10. WAGE PRICE SPIRAL
Due to inflationary expectations where people start to panic. This leads them to demand higher wages. Under such pressure organizations tend to increase wages. However more money in the hands of people only adds to inflation causing prices to rise further. Thus inflationary expectations continues unabated causing further panic and demands for wage hikes leading into a self perpetuating cycle of wage hikes and inflation and so on.

11. WAGE PRICE SPIRAL
This self perpetuating cycle of rising inflation followed by rising wages and then again rising inflation and so on is known as the
Wage Price Spiral.

12. WAGE PRICE SPIRAL
Hope this story has further clarified the meaning of wage price spiral

13. Please give us your feedback at

14. DISCLAIMER
The views expressed in this lesson are for information purposes only and do not construe to be any investment, legal or taxation advice. The lesson is a conceptual representation and may not include several nuances that are associated and vital. The purpose of this lesson is to clarify the basics of the concept so that readers at large can relate and thereby take more interest in the product / concept. In a nutshell, Professor Simply Simple lessons should be seen from the perspective of it being a primer on financial concepts. The contents are topical in nature and held true at the time of creation of the lesson. This is not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this material will be at your own risk. Tata Asset Management Ltd. will not be liable for the consequences of such action.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.