A Macroeconomic Analysis of Wage-Price Spirals

Inflation in 2023 is being stoked by domestic price drivers and paral¬lels with the 1970s and 1980s highlight the close connection between labour costs and inflation rates. Most cost drivers that are not directly dependent on wages have no inherent tendency to induce cumulative price increases. An analysis of the correlation between inflation and income distribution reveals no evidence of a profit-price spiral across the whole economy and, indeed, in 2022 the functional distribution of income remained virtually unchanged. Moreover, an empirical analysis of the Phillips curve for Germany from 2015 to 2023 shows that inflation expectations, unemployment and external factors are the key factors behind inflationary trends, thus rehabilitating the Phillips curve as a theoretical instrument for explaining price changes and confirming that labour market developments are an important influence on price trends. Finally, it needs to be emphasised that central banks should react to (loom¬ing) wage-price spirals with a restrictive monetary policy in order to prevent inflation reaching system-threatening levels. The authors therefore warn of the dangers of a pro-cyclical wage policy in Germany and stress the need to avoid the second-round effects of inflation.