Are we on the verge of a wage / price death spiral?

[Leo R.]

Hey folks,

I'm interested to hear the BP community's thoughts on whether we could be on the brink of a wage / price spiral in the U.S.

A wage / price spiral occurs when wages increase (which is occurring), and those increased wages cause the prices of goods and services to increase (inflation, which is also occurring), and that increased inflation causes wages to increase more, and the cycle continues on and on until you're paying $100 for a loaf of bread.

A bit more specifically, the theory is: increases in wages creates more discretionary money that people use to buy more goods and services (demand goes up), and this increased demand causes prices to go up (inflation increases), that increased inflation increases demand for higher wages (workers will only work jobs that pay enough to afford the costs of the inflated goods and services), and those higher wages increase the cost of production of goods and services, which increases the price of those goods and services (more inflation).

I've seen a variety of opinions on this topic...

Some people think we're already in a wage / price spiral, or that we're on the brink of one (for instance, see this Marketplace article: https://www.marketplace.org/20... )   ...others seem to take the perspective that a wage / price spiral is a "dangerous myth" (for instance, see this article from the libertarian-leaning Cato Institute: https://www.cato.org/commentar... )

What we do know: the two main ingredients for a wage / price spiral (increasing wages and increasing inflation) are present.  Fed Chair Jerome Powell has mentioned that the current labor market is so tight that is "unhealthy" (i.e.; there are plenty of jobs and relatively few workers, which is helping to drive wages up), and we also currently have the highest inflation in over 40 years (caused by a perfect storm of a supply chain hampered by COVID and the Ukraine War, years of extremely cheap debt, significant amounts of cash entering the market, and pent up demand--among other factors).

The most often-cited solution to stop a wage/price spiral is to increase interest rates, which should cool off demand. It certainly looks like the rate increases we've already had are already slowing demand for real estate in many markets, as evidenced by more days on market, inventory increases, more price reductions, etc.

What do you think? 

Are we on the brink of a wage / price spiral, or already in one? Is a wage price spiral even a real phenomenon? If we do have a wage / price spiral, how quickly can it be stopped? How would a wage / price spiral impact various areas of real estate? How much higher will rates need to go before we stamp out inflation, and how long could that process take?

This is a nuanced topic, and I'm interested to hear what folks have to say!