Wage Push Inflation
Candlefocus EditorFor wages to stimulate inflation and prices to rise, the increase in wages must exceed that of productivity. As businesses are hampered by these higher wages, they must increase the prices of goods and services. When this happens, purchasing power for fixed-income consumers decreases and the cost of living becomes increasingly expensive.
In macroeconomics, the notion of a “Phillips Curve” is used to explain the relationship between wages and prices, showing that when wages increase, the rate of inflation rises as well, as wages are a major factor contributing to the overall pool of aggregate demand.
In order to prevent or limit the rate of wage-push inflation, governments often have to raise taxes or interest rates to curb the level of aggregate demand and reduce the pressure on wages and prices. Likewise, a decrease in taxes can, in some instances, stimulate demand, but it can also create long-term problems, such as rising wages and prices.
In conclusion, wage push inflation is an issue of major concern for governments, businesses, and consumers alike. It can lead to an unstable, decreasing standard of living for many households if wages do not keep pace with inflation and if inflation is not effectively addressed by governments. The “Phillips Curve” is a useful tool that helps to illustrate the relationship between wages and prices and can be used to inform policy decisions. Moreover, in order to reduce the impact of wage-push inflation and improve the standard of living for fixed-income consumers, policymakers must take actions to reduce the pressure on wages and prices, such as increasing taxes or interest rates.