how a spiral begins
a wage price spiral is caused by the effect of supply and demand on aggregate prices people who earn more than the cost of living select an allocation mix between savings and consumer spending as wages increase so does a consumer s propensity to both save and consume if the minimum wage increases consumers within the economy will purchase more products which would increase demand the rise in aggregate demand and the increased wage burden cause businesses to increase the prices of products and services in jan 2024 22 states increased their minimum wage states with hourly rates that match or exceed 15 per hour include maryland new jersey new york california connecticut massachusetts and washington 1although wages are higher increasing prices causes workers to demand higher salaries if higher wages are granted a spiral where prices increase may occur repeating the cycle until wage levels can no longer be supported stopping a wage price spirala wage price spiral often makes inflation higher than is ideal the federal reserve in the u s aims to sustain an inflation rate of 2 2 governments tackle an inflationary environment through the actions of the federal reserve or a central bank a country s central bank can use monetary policy the interest rate reserve requirements or open market operations to curb the wage price spiral the united states has used monetary policy to curb inflation but sometimes triggered recession the 1970s were a time of oil price increases by opec that resulted in increased domestic inflation the federal reserve responded by raising interest rates to control inflation stopping the spiral in the short term but acting as the catalyst for a recession in the early 1980s inflation targeting is a strategy for a monetary policy whereby the central bank sets a target inflation rate over a period and makes adjustments to achieve and maintain that rate in 2018 ben s bernanke thomas laubach frederic s mishkin and adam s posen argued in inflation targeting lessons from the international experience the advantages and disadvantages of inflation targeting and concluded that governments should use their discretion based on the circumstances when deciding to use inflation targeting as a tool to control the economy 3