ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
An economy has experienced prices rising by 2% a year, but a government raises the inflation target and wages are indexed to prices. Workers at Kestrel Ltd demand pay rises purely because they expect prices to rise further, and Kestrel raises its prices to cover the pay rises, triggering further wage claims. Which concept does this describe?
This is a wage-price spiral driven by inflationary expectations. Workers claim higher pay because they expect rising prices, firms raise prices to cover the costs, and this triggers further wage claims. It is self-reinforcing inflation, not deflation, fiscal drag or disinflation, which is merely slower inflation.
- AWage-price spiral driven by inflationary expectationsCorrect
- BDeflationary spiral
- CFiscal drag
- DDisinflation
Explanation
Expected inflation leads to higher wage demands, which raise costs and prices, which in turn feed new wage claims: a wage-price spiral. A deflationary spiral involves falling prices. Fiscal drag relates to taxation of rising nominal incomes. Disinflation is a slowing in the inflation rate.
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