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!

[Scott Trench]

One interesting thing about the depression prognosticators is that folks dismiss the possibility of a deflationary depression as not possible or highly unlikely because of the fiat dollar. How can you have deflation, one might ask, when you can print as many dollars as it takes to beat deflation? 

Well, Japan experienced ~1% deflation on average for decades. And they have a fiat currency. It should be as easy as "give everyone a few thousand dollars (in yen of course) and let them go to town," right? 

How? Why? What happened that caused Japan to experience deflation for so long?

Numerous causes, but I believe the primary one is because of their aging population. 

Deflation is the friend of the old. Their savings are worth more with each passing year, and can purchase more labor from the young people who live in their economies. Real wealth transfers, on average, from the young to the old in a deflationary environment.

Inflation is the friend of the young and able-bodied. They will be the ones who earn more and see their labor purchase relatively more goods and services, and they have little wealth which can lose it's purchasing power. Real wealth transfers from the old to the young in an inflationary environment.

While the US too, will get older, we have advantages over many Asian and European countries in the form of migration from young, able-bodied people who travel from all over the world, and particularly, from South and Central America. I think that as long as we have an influx of young, able-bodied people (who vote), we will be able to stave off the serious evils of even moderate deflation benefitting the interests of older Americans at the expense of economic growth, and hopefully prevent a depression from recurring.

I think that as long as our population does not get too old, and the dollar remains it's position of relative strength, that a deflationary depression is unlikely. The last depression was related not to underlying world economic weakness, but to deflationary pressures that caused the money supply to evaporate. That should be avoidable with even halfway reasonable central banking in countries with fiat currencies.

However, only time will tell on that front.

@Catherine Coy careful not to get this too political and start talking about current, or very recent administrations. We don't do that on BiggerPockets.