It’s a classic vicious circle: when inflation is high, i.e. the prices of goods and services are rising across the board and for a longer period of time, citizens can buy less with their wages. The so-called real wage falls. This gets the unions on the scene: they try to negotiate higher wages so that inflation is offset and real wages rise again. These higher wages in turn cause higher costs for companies, which they compensate for either through savings or higher prices. If they add the increased cost to their prizes, the game starts over.
So wages and prices keep driving each other up – the dreaded wage-price spiral begins. Incidentally, since rising inflation is usually the trigger, trade unions prefer to speak of a price-wage spiral to make it clear that their wage demands are not the trigger of this problem. In economics, however, the term wage-price spiral has long been established. Regardless, once you get caught up in this vicious circle, it’s very difficult to get out.
What helps against a wage-price spiral?
The way out of a wage-price spiral is difficult and, above all, usually painful. Because often nothing helps but a hard cut. The central banks, which are responsible for price stability, are responsible for this. You have to counteract this with strong interest rate hikes.
In theory, the high interest rates are intended to dampen economic activity: loans are becoming more expensive, companies can expand less, and consumers consume less. The economy stalls and prices fall again. The problem is that interest rate hikes take a long time to have this effect, it can take up to a year. By then, however, the economic situation may have changed completely. That is why a sense of proportion is so important when it comes to interest rate policy.
The role of the state
The state can also help to cushion inflation. For example, through direct grants to citizens or by giving companies the opportunity to pay their employees tax-free grants – just like the federal government has done. Many companies also make use of this and these subsidies have also been integrated into many collective bargaining agreements as so-called one-off payments.
But they are a double-edged sword. They relieve the companies, since such one-off payments do not cause wage costs to rise in the long term. For the employees, however, this is only a short-term relief, because the prices remain high, but the one-time payment does not increase their income permanently.
Are we already in the wage-price spiral?
At first glance, the collective bargaining demands of the trade unions this year appear to be very high. The wage settlements that have already been agreed, such as those in the public sector, also provide for unusually high wage increases. So has the vicious circle already begun? Most economists say no. Hardly any contract is above the current inflation rate, one-time payments are often provided and staggered tariff increases depending on income.
The burden of inflation is therefore not only passed on to companies, part of it is also borne by employees. This is the difference to the 1970s: At that time, the ÖTV union had pushed through a wage increase of eleven percent for the public sector, but inflation was only just under seven percent.
“Greed inflation” or profit-price spiral?
A relatively new term has been circulating for some time: greed inflation or, to put it more objectively, the profit-price spiral. Some economists and consumer advocates have expressed suspicion that companies with unjustifiably high price increases are fueling inflation. Some of the triggers for this are high profit increases at some companies.
In order to prove this, one would have to dive deep into the balance sheet analysis of the respective companies. This is not always possible because not all companies publish their balance sheets. Where possible, the Handelsblatt has found that there is no sign of a broad “greed inflation”. Most DAX companies could not increase their so-called trading margin. That is, profits have not increased because of higher prices, but because companies have expanded their business.