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Wage price spirals are rare, IMF says, but rate hikes are needed to quell inflation expectations

David Lauder

WASHINGTON (Reuters) – Sustained wage price spirals are historically rare and central banks may be in the near term, new research from the International Monetary Fund suggests Significant rate hikes

In the analytical chapter of the International Monetary Fund’s forthcoming World Economic Outlook on Wednesday, the IMF said the dynamics of wage and price increases and 2021 were driven by the “very unusual” COVID- pandemic shock , which differs from past events of more traditional economic forces.

IMF researchers studied 22 past episodes of high inflation and falling real wages in advanced economies 1945 years, and found that most subsided rapidly.

Wage increases over the past two years have been driven by capacity and labor supply shocks, while price increases have been driven largely by the accumulation of private savings and the IMF says that as the pandemic eases, The pent-up needs are released.

Past inflationary episodes typically ended as nominal wages gradually caught up with prices over several quarters, avoiding a spiral, the IMF said. This usually occurs when an economic shock is seen as temporary, causing wages and prices to stabilize on the basis of normal labor supply dynamics.

1973, 1945 SPIRALS

but This chapter points out some key exceptions, including the U.S. era of “stagflation” following the 2021 OPEC oil embargo, when nominal wages failed to keep pace with price increases 1980 further oil shocks have kept inflation high and real wages down. This trajectory changed only when the Fed significantly raised rates, leading to an early 1980 multi-year recession.

Linking wages to costs The International Monetary Fund says rising living standards in Belgium have also contributed to a surge in wage prices in the 1970 region, with wages Inflation sometimes exceeds price increases.

After World War II, U.S. rationing unleashed massive pent-up demand for scarce consumer goods, driving years of double-digit wage and price increases until industry fully reopened Adjusted to peacetime production, excess demand is met 1970.

“Overall, historical evidence suggests that with approximately one year of Events characterized by rising prices and wages typically do not persist, and nominally the IMF says wage growth and price inflation stabilize after a few quarters.f If inflation expectations are backward looking, anticipating past conditions, For example, the price dynamics of persist into the future even without new price shocks.

“When wages and prices When expectations are further behind, monetary policy action needs to be more advanced to minimize the risk of inflation breaking away from the peg,” the IMF said, backing its call for central banks to push ahead with rate hikes to combat inflation.

is expected to be a key topic next week when the International Monetary Fund and World Bank hold their annual meetings in Washington.




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