SYLVIE DOUGLIS, BYLINE: NPR.

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ADRIAN MA, HOST:

A wage-price spiral - the very mention of this phrase strikes fear into the hearts of central bankers everywhere because a wage-price spiral is the nightmare scenario for inflation run amuck. And you have probably seen this phrase invoked in news stories, uttered by various experts and policy wonks.

DARIAN WOODS, HOST:

Or economics podcasters who are trying to explain how inflation could run out of control. Here is just one example from our show. It was back in fall 2021. We did a Halloween show. It was a bit of a kind of fictional radio play in which a demon described how inflation erodes the value of money and how that could trigger a wage-price spiral.

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UNIDENTIFIED ACTOR #1: (As demon) Thanks to me, the dollar's value has eroded. And as people realize that, they'll spend their money even quicker before it loses even more value. They'll demand higher wages, which will make businesses raise their prices, and that will trigger more inflation.

UNIDENTIFIED ACTOR #2: (As child) No.

UNIDENTIFIED ACTOR #1: (As demon) The cycle goes on and on and on and on until all of your money is worthless (laughter).

UNIDENTIFIED ACTOR #2: (As child) No, my money.

WOODS: So a bit of a nightmare, but, you know, there is actually a fair bit of debate over how real a threat wage-price spirals are. For some economists, wage-price spirals are not some law of economics, and for others, they go as far as to say it's a myth.

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WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

MA: And I'm Adrian Ma. The latest measures of inflation are out today, and they show consumer prices running at 6.4% higher than a year ago. That's only slightly lower than it was last month and a sign that abnormally high inflation may be with us for a while. With that in mind, we're going to consider the nightmare scenario of wage-price spirals. But also, we'll learn why it may not be something to lose sleep over.

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MA: In theory, every wage-price spiral has three essential ingredients. You got wages...

WOODS: What people get paid.

MA: ...Prices...

WOODS: What companies charge for their products.

MA: ...And expectations.

WOODS: What workers and companies think inflation will do in the future.

MA: And when inflation is running hot, and everybody expects that to continue, these three elements can sort of combine and feed back off one another into what economist John O'Trakoun describes as a doom loop.

WOODS: To be clear, not an official economics term.

MA: (Laughter) Although maybe it should be.

JOHN O'TRAKOUN: Workers demand higher wages to keep up with the elevated cost of living. And businesses, they raise the prices of their products and services in order to cover these higher labor costs, and so it just keeps reinforcing itself. Higher wages leads to higher prices, leads to higher expectations, all spiraling around, swirling around the toilet bowl, leading to very bad outcomes.

WOODS: That's some pretty vivid language.

MA: That might be the first time I've heard toilet bowl as a metaphor for the economy, but it doesn't feel inaccurate.

WOODS: John works at the Federal Reserve Bank of Richmond, and he recently wrote about the wage-price spiral for the bank's blog. He says that the last time the U.S. saw something like a wage-price spiral was in the 1970s. And by the end of that decade, the inflation rate peaked at over 14%. And while multiple causes added to the inflation during that period, John says that one big factor was this feedback loop between wages and prices.

O'TRAKOUN: So back then, more of the economy was in manufacturing. A lot of these workers were in unions, and so they had wages that were pegged to inflation.

MA: It was in their contract, right? So if inflation went up, so did the workers' wages. But rising wages really ate into the companies' profit margins, so they passed that cost on to the customers, leading to more inflation. John says this really strong link between wages and prices contributed to the inflation spiraling higher and higher.

WOODS: But in the decades that followed, the tight relationship between wages and prices starts to break down. John points to a few reasons. For one thing, union membership plummeted, so those contracts requiring inflation-adjusted raises for big groups of workers became less common.

MA: Meanwhile, companies found ways to grow their profit margins. They did this by combining and consolidating with other companies, by getting cheaper production materials from overseas and outsourcing and automating certain workers out of the job. And because companies found all these ways to fatten their profit margin, they could afford to give workers the occasional raise and not have to raise prices for their products. And this is part of the reason why, by the time we get to the late 2010s...

O'TRAKOUN: It seemed like wage-price spirals were just in the '70s, and they were, like, a thing of the past. We vanquished it, and it's over.

MA: A lot of economists saw wage-price spirals as this relic from the '70s, like disco and bellbottom pants.

WOODS: But, you know, Adrian, disco and bellbottom pants are having a bit of a revival.

MA: Well, yeah, that's true. And similarly, during the past couple years of the pandemic, some economists start to worry that the wage-price spiral could also make a comeback. After all, the key ingredients were there. Prices and wages were rising faster than usual, and for a while, people expected that to continue. Oh, and also, on top of that, companies were running into things like supply chain problems and labor shortages. And many of them responded by passing that additional cost onto consumers.

O'TRAKOUN: So economists were starting to find evidence that the three parts of the wage-price spiral - wages, prices and expectations - were all starting to come together and start swirling together. And that's one of the reasons the Fed became more attentive to this kind of inflation risk during the pandemic.

WOODS: Now, before we all kind of freak out, Adrian, like, John is actually saying that most of the data, in his view, says that we're not in any real danger of a wage-price spiral. Inflation, yes, it's still abnormally high, but the trend is going down. And that's the same with wages and same with people's expectations of inflation. And that's at least partly because, unlike the 1970s, the Fed today is super serious about getting inflation down. They have been saying they would do whatever it takes to get inflation down to 2%.

MA: So does that mean there's nothing to worry about? Does it mean that wage-price spirals are, as some economists would suggest, a myth? Well, Jason Furman, an economist at Harvard, wouldn't go that far. I mean, he doesn't worry about a wage-price spiral going up and up and up into an, like, infinite doom loop. Jason says he is worried about something he calls wage-price persistence.

JASON FURMAN: Which is where once inflation gets high and once wage growth gets high, they both stay high for a while, and they feed into each other staying high for a while.

WOODS: Over the past year, wages have not kept up with the pace of inflation, but before inflation, they've been growing faster than usual. In recent years, wage growth hovered around a rate of 3- or 4% a year. And more recent data shows wages growing at a rate of more than 6%, and it's even higher for sectors like leisure and hospitality.

FURMAN: You want to think of inflation as being shock and propagation. Something happens - oil prices go up; there's a microchip shortage; there's too big a fiscal stimulus - and that starts your inflation. Even when that cause is behind us, you might still have inflation and that the inflation problem won't solve itself.

MA: Bottom line, Jason says he's pretty concerned about wage-price persistence. And if it continues, he says we're probably not going to get that soft landing we're all hoping for - right? - you know, where we whip inflation but avoid a recession? Still, Jason also says, who really knows?

FURMAN: Everything in the economy has been really different than what we've seen before over the last two years. So there is a lot more uncertainty about whether any of the economic laws are holding right now. So we definitely could get lucky. I just don't know if it's the most likely outcome.

MA: Yeah, I don't know, Darian. I mean, with that prediction, maybe this is a good time to think about a side hustle.

WOODS: I'm going to invest in Sister Sledge records 'cause I think they will hold their value of more than a hundred-dollar bill.

MA: You know what? Maybe you could open a store that's old disco records and bellbottoms. You know what they say about diversifying incomes?

WOODS: Darian's Diversified Disco Discs and Dress-ups.

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MA: This episode was produced by Noah Glick, with engineering from Katherine Silva. Sierra Juarez checked the facts. Viet Le is our senior producer. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.

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