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A-Level Economics · SRAS shift left (cost-push inflation) diagram question

The wage-price spiral: how does it feed cost-push inflation?

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The answer

Workers demand higher wages to compensate for falling purchasing power; firms accept, costs rise, and firms pass those costs on as higher prices. Wages chase prices, prices chase wages. Once inflation is anticipated the loop becomes self-fulfilling and very hard to break. Once inflation is anticipated, workers demand higher wages to compensate for the falling purchasing power of their pay. If firms accept, their costs of production rise and they pass those costs on via higher prices — an uncontrollable wage-price spiral. Rational consumers also bring spending forward to lock in today's prices, adding demand-pull pressure on top.

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