How does inflation cause a wage-price spiral, and what can governments do to prevent it?
Answer (1)
A wage-price spiral happens when workers demand higher wages because of rising prices, and then businesses respond by raising prices to cover the higher labor costs. This cycle repeats itself—higher wages lead to higher prices, and higher prices lead to even more wage demands. If left uncontrolled, this can make inflation worse and harder to stop.Here’s how it works in the Philippine setting. Suppose prices of rice, fuel, and electricity go up. Workers feel that their salary is no longer enough for their daily needs, so they ask for a wage increase. If companies agree, they now have higher operating costs. To protect their profits, they raise the prices of the goods and services they sell. Customers, including the same workers, now face even higher prices—and the cycle begins again.This happened in the Philippines in 2018, when inflation rose due to the TRAIN law (which increased excise taxes on fuel and sugary drinks), global oil price hikes, and supply issues. Workers asked for wage increases, especially in NCR and Region IV-A. Some employers raised prices to cover the new wage rates, which made inflation worse.To prevent a wage-price spiral, governments can do the following:Control inflation expectations – Through clear communication and stable policies, the Bangko Sentral ng Pilipinas (BSP) can help people believe that inflation will not spiral out of control.Use interest rates wisely – By increasing rates, BSP can reduce demand and slow price increases.Support supply chains – Governments can ensure stable food and fuel supply to reduce the original cause of inflation.Negotiate wage increases carefully – Instead of sudden, large wage hikes, gradual and region-specific increases may prevent sharp price responses from businesses.In short, the wage-price spiral is a feedback loop between wages and prices. Breaking that loop requires careful balance between protecting workers’ rights and maintaining stable prices.
