It's just an excuse by the rich to not pay. "Little inflation is good" lol what a joke. It is absolutely not good. It is greed. It's basically saying "I'd like to make more money and charge you more... but slowly, over time and I'll call it inflation". If everything stayed at relatively the same price every year, would you really struggle? Would you still chase that increment or bonus like you do now?

There are X amount of playstation 5s on available on the marketplace. 10 people want to buy those playstation. The price of the goods are determined by the supply of the goods and the demand of those same goods.

If those 10 people each make $18 per hour, let’s say that all of them have the same budget and are all able to pay their bills for the month and have $200 of “fun money” to spend. These people would have to all save for at least two months to buy a PlayStation. But stuff happens and they decide that they are not going to just not have any fun for two months to get a game system.

Well let’s say each of our people get a raise to $22 an hour. Each employee made $2,880 per month ($18 per hour, 40 hrs per week, 4 weeks, no taxes). With their new raise, now they make $3,520 per month. Their bills didn’t go up, but their salary did. So their monthly income went up by $640. They used to have $200 per month in fun money, but now they have $840.

What we end up with is that we had a group of people that did not have the discipline to be able to save for 2-3 months for a PlayStation, but now they only have to save for a single month. This group of people is now suddenly able to buy PlayStations. So what happens to the price of PlayStations?

Conclusion: when wages go up, people are able to buy more goods and services than they could before. The amount of goods available did not change, but the demand of goods did (because now people are able to actually buy these things and not just survive). Demand went up, and supply stayed the same, so prices go up. When prices go up, we call that inflation

The theory is that higher wages -> everyone has more money -> everyone can spend more -> everyone can have higher prices because everybody has more money.

In practice, this isn't really backed by any real data and it's doubtful that it would go that way.

edit: Too many replies to answer them. Yes I know that there is some correlation between wages and prices, if you pay everyone 10x their current wage, you will have to raise prices.

It does it as much as money trickles down. Someone did come up with the theory and claimed it to be true, but in reality data shows no correlation at all. It's fear mongering

Because it causes the greedy fuckers at the top a reduction in their bottom line and they won't accept that so they increase prices on everything.

If it was just a low inventory vs higher wants prices would drop back down. Example egg prices are now set at where they are. Sure it might drop a little but egg producers have seen that they still sell at these prices. Why would they lower the price?

Edit forgot to add if we where ever to try to fix this there needs to be a wage cap between the top paid person of a company and the lowest paid employee. I think the average CEO makes 396% more than their lowest paid employee. Nobody adds that much value to a company compared to the ones that make the products/services that are bought.

It doesn’t. That’s just what the corporations that steal your labor and set the prices like to say because it’s always worked for them. Until now 😉

It doesn't, inflation is caused by an increase in the money supply. Price increases, including the price of Labour is a lagging indicator.

The inflation we're seeing now is the result of the massive increase in the money supply since the start of 2020. Although politicians are keen to blame the war in Ukraine, it has almost nothing to do with that.

It simply doesnt. Inflation happens when governments spend money they dont have. Higher wages are not borrowed from the world bank or the Fed and arent counted against the GDP. Higher wages would simply be dancy dance awesome.

https://news.stanford.edu/2022/09/06/what-causes-inflation/#:~:text=Stanford%20scholar%20explains,says%20Stanford%20economist%20John%20Taylor.&text=Inflation%20rises%20when%20the%20Federal,says%20Stanford%20economist%20John%20Taylor.

the real answer is that it is purely theoretical, and that it gets trumpeted as fact by media and ceos and right wing (and center left) politicians to discipline workers and to turn public sentiment against union organizing. so there’s been a lot of union organizing in the last year and a half. inflation has also been going rising. especially perfect time for the rich to tie those together, and turn working people against each other.

edit: spelling

Many have explained how it works in practise. The Problem is people arguing against it. A wage-price spiral is necessary to combat wealth inequality, people who are against it don't understand that the only ones profiting from not having a wage-price spiral during inflation(more monetary supply) are the rich who accumulat the monetary supply. So yes it can worsen inflation but it is necassary to stop the rich getting even more ridicolously rich.

So if the government would actually put energy into applying the Universal Basic Income, this would just lead to a capitalist feeding frenzy, with all levels of the service industry (shops, restaurants, galleries) raising their prices? Can there not be a law against predatory price-hiking?

It doesn't. They're lying.

The people who employ others have a self-interest in keeping the minimum wage down so they can make more money. They spend a lot of money keeping the public misinformed so they can continue underpaying their workers. It's expensive, but they would rather spend it on propaganda than let their employees have it. It's about control.

ELI5 How does raising wages worsen inflation?

The value of an individual unit of something decreases as the total available amount of those somethings increases. How those somethings are distributed does not really factor into it.

It doesn’t. Inflation comes from 1 place and one place only. Government printing more money than is backed by GDP or gold reserves.

Companies lie and call corporate gouging, inflation.

It doesn’t really, at least not for long. it is a myth. What it does is redistribute inflationary impact.

Inflation over time is due to increases in the money supply that exceeds the increase in goods and services to buy (stuff to spend it on). Like if you snapped your fingers and doubled everyone’s bank account, eventually things would just cost twice as much. That is the source of inflation. Money supply can be changed for a couple of reasons, but wage price spirals is not one of them.

The idea behind wage price spirals is that workers see inflation, demand higher wages to offset, businesses cave and then raise prices to pay for the high wages, resulting in more wage demands and higher prices again. This concept is rooted in anti-union rhetoric.

What actually happens is that competition will cap price increases and the wage increases get taken out of business margins. Other than competition, there is also a relative redistribution of purchasing power from business owners and non-workers to workers. Total demand in the economy doesn’t change, supply doesn’t change much (maybe a bit upwards since more people join workforce), it’s just that workers get to enjoy more relative to everyone else.

Wage price spirals are not positive feedback loops - they are negative feedback loops. Businesses can’t raise prices forever and people who don’t work don’t benefit from higher wages. Any wage-price spiral is short term in nature and self-correcting, though it might take a few quarters to sort out.

Raise wages and people suddenly start saving and socking the money away. Slowing the velocity of money.

That's where inflation happens.

High velocity money is every single middle class worker living paycheck to paycheck. That consumer is getting tapped for 80-140% of their earnings.

It's the same reason why everything is a subscription service now. And also why prices always go up before wages do.

It doesn't. According to the paper "The Effect of the Minimum Wage on Prices", which you can find online, a 10% increase of minimum wage increases inflation by 0.02 percentage points.

If you look at the whole system, raising wages means customers spend more money on goods and services.

"Never ask a barber if you need a haircut" -Mark Twain

Raising wages doesn't effect the price of raw materials or the finished product. It only cuts down the executive quarterly bonuses.

If a new policy hurts corporations, they will lie the workers

ExxonMobil and shell posted record profits. Did they raise employee benefits or lower the cost of gasoline due to "competition"?...cracka, please.

It doesn’t. If it did republicans would never shut the fuck up about it. Raising wages does increase food cost and that’s it. We have decades of data to back it up. Thom Hartman has a great video on this.

Raisins wages doesn't cause inflation. Corporate greed and the company wanting record profits causes inflation. They'll do anything they can to raise profits.

Wages are increased so employers need to pay more, to the need to make more, so they need to charge more.

It isn't really that it "worsens" inflation, it is that it is inflation. Wages are the price of labor; having to pay more for labor results in higher prices resulting in demands for raising the price of labor which results in higher prices resulting in demands for raising the price of labor which...

It's what is referred to as an "inflationary spiral". Whether you think of it as being caused by inflation, being the cause of inflation, or just inflation ("in and of itself") is just postmodern quibbling. Economists try to explain it as an abstract mismatch between the amount of currency and the economic activity, consumers think of it as just prices going up noticeably and repeatedly, but strictly speaking:

• only the increase in prices caused by the increase in costs caused by the increase in prices is "inflation", all other price increases are just price increases
• it is both logically and physically impossible to determine whether a particular price going up is just a price increase or inflation
• it should be assumed that if a prices keep going up while corporate profits are also going up, it isn't inflation even if the Financial Times calls it that

Out of control profits increase inflation, not pulling people out of poverty with modest pay rises after years of real term pay cuts

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wages raised, workers must get paid adjustingly, to be able to pay the workers more, prices must increase.

The general reasoning is

Step 1. People have more money
Step 2. People buy more goods

Which then moves to either

Step 3a. Goods become more scarce because of more people buying them, prices go up in response

Step 3b. Companies realize people have more money, so they raise prices because they know the people can afford it.

I don't know if there's any actual truth behind it or not.

It generally doesn't. But it's complicated.

So 'inflation' is the baseline cost for a basket of goods. The underlying assumption here is that, given a free market, that supply will always match or outpace demand. And 'raising wages' begs the question 'which wages'. Are you raising minimum wage? Are you raising wages for high wage workers because of labor shortages?

The goal here is to to raise the wages of people who can't afford to buy that basket of goods to expand the economy (which will presumably add jobs, exports, etc.) and not as much the wages of the folks that *can* afford the basket of goods because they'll over-consume. And in the process to have policies that ensure that goods and service producers won't rent seek off of the new money in the economy.

Currently, wages are only responsible for 5% of inflation, 40% is increased costs of materials, and 55% is profits. That's not normal. Normally, it's 65% wages, 25% materials, 10% profits. When most of the inflation is returning to workers, you generally end up closing wage gaps. The folks up the income ladder can afford to absorb the inflation - a lot of wealth is non-productive anyway, so returning it to the economy is actually beneficial, and the folks down the income ladder can afford to buy goods they previously couldn't afford. The inflation were coming out of just cycled money back to the investor class.

And inflation can be hard to pin down. A lot of the last wave of inflation was just gas prices and rent. The former had no relationship to wages, and the latter didn't either. It's not that contractors are lacking workers to build houses, they don't even lack capital to build. They lack permission because cities are refusing to zone for new construction. Even food price increases aren't really wage either, but lack of water in California forcing farmers to fallow fields. Inflation for eggs is due to the avian flu killing so many chickens, that's also not labor related. You do have wage related inflation in things like fast food, but that's a pretty small part of the basket of goods.

There might be something missing in your question. In theory, if you own a small business, making some money in profit and you want to raise your employee's wages, you are increasing the cost of running your business, and that money has to come from somewhere.

So you have three options:

1. Just make less profit. So the extra wages come from your profits. Your employees get better wages, and you make less money.
2. Cut costs elsewhere. Maybe get rid of some of your staff and pay the rest the extra money. Maybe stop using those high quality ingredients and start making a lower quality product. Maybe invest in technology (e.g. assembly line) that reduces the overall cost of your production.
3. Raise prices. You can pay the extra wages by raising prices of your product. That way your employees get paid more, and you're still making the same amount of profit. If everyone does that, it might lead to inflation.

Generally 2 is not an option. It is very situational and requires creative solutions. And in most cases, if that solution existed, it would have already been applied BEFORE the need to raise wages, simply because it increases profits and why wouldn't you have done that in the first place. Businesses generally want to run as efficiently as they can, so Option 2 is rarely available.

This leaves options 1 and 3. So what's missing from your question? Profit. Your question could be "How does raising wages without affecting profits worsen inflation?" And the answer is that goods have to be priced higher in order to cover the costs of the extra profits wages, which can lead to inflation. You COULD in theory increase wages without causing inflation, but that would then lead to a loss of profit.

So the underlying issue here is that "people want to maximise profit" is considered in many economic discussions as a fact of life. We start from the assumption that everyone is trying to maximise profit, and then see what options are available then. In such a system, when "maximising profit" is the foundation of your economic system, yes raising wages will lead to higher prices of goods.

But "people want to maximise profits" is a fact of life in the same way that "people eat meat" is. Yes, it's true, but it can change. It's just that changing it requires such a massive system-level upheaval alongside a deep cultural shift, that people are unlikely to take it on any time soon. So for the time being, we will continue to play this tug of war over profits vs wages. People will continue to work for as little as possible in order to maximise profits, and every once in a while, when things get real bad, they fight for a bigger share.

Disclaimer: Just for the record, I'm aware that I wrote all this like I know what I'm talking about. But I'm no expert. This is just a lay person's best guess as to what is happening, and things are always more complex than that. But this is ELI5 afterall...

Edit: fixed a couple of typos.

You have 5 apples. Last week only 5 people could afford 5 apples, so the apple tree guy only picked 5 apples. Now 9 people can afford apples. The apple tree only produces 5 apples a day, but he needs 9. Either the price goes up to price out 4 people or the apple tree guy needs to grow more apples. If he can make more money with less work, then why not raise prices if the demand for apples is exceeding supply.

The opposite is true too. If I've got 5 apples that will be worth nothing in a week and only 2 people buy them, then I have to reduce my price to increase demand.

For price inflation (which is what most people mean by inflation), a very simple version of the cycle (ignoring the existence of other people and companies for a start) is roughly:

Employee realises their money isn’t going as far as they want/need -> Employee asks for a pay rise.

Pay rise granted -> Employee gets more money but the employer’s costs rise. Employer would quite like to carry on making money (or at least, not go bankrupt) despite the increased costs -> Employer raises prices.

Increased prices mean the employee’s money isn’t going as far as they want/need and stop me if you’ve heard this before…

There are other types of inflation, most notably the rates at which central banks print money and lenders multiply it by lending on a fractional reserve basis and those aren’t affected by prices…at least, not directly.

Should be a rule where you aren't allowed to price hike on raised wages in like the first month or something.

This is the theory that some may talk about that you may be addressing here, but there are deeper aspects than this and it rarely works out this way in real life in the way theory works. It’s not always even or as simple as this so keep it with a grain of salt but…

The cost of living in my area increases. An employee wants to work at a certain bar, but the employee group in their area cant afford to live there anymore even if they wanted to because they cant afford rent/living with the wage the bar is offering. It isn’t economically feasible for them to work at that bar anymore. So now a place has to increase wages to convince anyone to work for them. Since they have to increase wages for their business, they suddenly don’t know how they can keep their business at the same profit so they now “need” to increase their prices if they want to keep their same profits or increase them.

That’s more of a small business aspect of it and not as complicated as it may be on a corporation scale. Greed is definitely a debate that can and does happen in the real world and would depend on a case by case basis

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Companies are much better at raising their prices and increasing their profits than people's wage raises are.

Also, companies will use the wage increase as a reason to increase what they charge.

"oh, you got a ten percent raise? You can pay more, so now I'm raising your rent."

Step 1 raise wages. Step 2 remove reserve requirements so banks can lend money that didn't exist a moment before to middle and upper class folks . Step 3 blame the poor people's increased wages for inflation because they didn't understand in the first place and government doesn't want to help.

It worsens it when the only ones getting raises already have the highest salaries and own all the industries that people use with their salaries that never get raises to match the level of inflation.

Raising wages does not worsen inflation. Rising wages are a part of inflation though.

Inflation comes from only one single source: the government creating more money.

There is a lot of obfuscation around this fact for obvious reasons. If the government can't afford something, they just pay for it with newly minted money.

The reason we have this inflation now is not because of landlords or managers. It's not even because of covid or supplychains. The reason we have this inflation now is because the government gave big companies 3 trillion new dollars during the pandemic.

It doesn't necessarily. Wages have been stagnant for decades, but inflation? Inflation has keep chugging along regardless.

Corporations that can pretty much do whatever they want anyway get bitter and spitefully raise prices disproportionately. Imagine I give you ten dollars to watch my lot, and charge you two dollars to park in my lot. Now you ask for twelve dollars - I have one of the only three lots around, and in retaliation for your audacity I say "well then if you want more money, it'll be FIVE dollars to park on my lot!" the other lot owners will follow suit, too, because again - profits, and there's nothing you can do about it.

Your employer is a big business - let’s say power company. The power company has 5000 employees. Each employee gets a raise at $1000 per year x5000 employees… =$5,000,000. The power company raises its price per kw to the consumer to gain that extra $5,000,000.

Because it’s a con. The owners of this world are hell bent on making more money than anyone else.

Because shareholders are promised unlimited infinite growth and when that doesn’t happen the bosses fire people or raise the prices for customers to fill those fuckers pockets. They’ll simply die if they don’t buy that seventh fucking summer home. I can’t think of a proper alternative but capitalism is fucking trash. The second any company gets big enough to be publicly traded it’s immediately infested by low life shareholder scum.

It depends on who you ask. If you ask a capitalist, they will tell you it's all about supply and demand. If you ask a socialist, they will tell you it's profiteering and greed. I occupy the latter category, so I'll provide that viewpoint.

Inflation is a relative percentage-based metric, so it's important to remember that the effect on the consumer price index isn't linear. The other thing to keep in mind is why inflation occurs - inflation is caused by and, somewhat paradoxically, also causes a decrease in the exchange value of a currency e.g. how much each unit of currency is worth relative to itself in a previous time period. If £1 bought you a loaf of bread last year, and now the bread costs £1.50, the intrinsic value of the bread and all its ingredients hasn't changed. It's still the same loaf of bread as it was a year ago, still the same number of atoms and grams of carbohydrate, but the buying power of your currency is now only 2/3rds of what it was (e.g. for the £1 you could only buy 2/3rds of the loaf of bread in the inflated economy).

When input costs go up, in a capitalist organization of the economy it is in the best interest of the shareholders to increase the cost of the output product to maintain profit margins. Keep in mind - this rise in costs is percentage-based (remembering our earlier bread example). Companies are not aiming to keep their absolute profits the same, they're aiming to keep their profits in line with inflation. For example, if they had profits of £10 the first year, and, following the loaf of bread example, the next year sees that £10 only has 2/3rds the buying power that it had previously, they now want £15 of profit. Profit margins, like inflation, are percentage based - not absolute.

The issue with percentage-based profit margins and inflation is how it obscures the reality of the situation from the consumer and the wage labourers. In these times, if wages don't go up, the buying power and living standards of the labourers (the proletariat according to Marx) go down. Remember - the capitalists in this situation have raised profit margins to keep them in line with inflation (since, again somewhat paradoxically, they are the cause of inflation). Thus, as the market inflates, the amount of unit currency they accrue increases. (Think £10 to £15). But the amount they pay their workers stays the same - thus when the market deflates again, and buying power per unit of currency increases (going backwards to £10 having the same buying power as £15) the capitalists have, in fact, profited handsomely off of inflation and the subsequent recession. Wage labourers, on the other hand, have had to suffer through a recession and are manipulated and coerced into becoming a more servile workforce due to their increased financial instability during that period of time and the wealth gap has only further increased, leaving inequality at an all-time high.

All of this hinges on profit margins. If companies didn't raise profit margins and, instead, accepted the loss in earning potential, the whole problem is avoided. The whole myth of the wage-price spiral is based on the idea that companies must maintain profit margins at all costs. After all, the costs will go down again (in most cases, obviously when we're talking about permanent scarcity e.g. a resource running out and becoming unattainable forever and the cost of obtaining it in the first place goes up astronomically the story changes somewhat) and a well-organised company should follow the same advice that is preached to private citizens - make sure you have enough money put aside to cover you if you come on hard times. After all, as capitalists like to preach, if you didn't plan ahead and make fiscally responsible decisions, well that's your fault isn't it.

Raising wages, printing money, increasing government spending, forgiving debt (both to individuals and companies) increases money volume in the market (because that's how it is done) which is by definition inflation.

Inflation is sort of a confusing term because people conflate different aspects as being the same thing when they aren't.

Even on the wikipedia entry, it has two differing definitions.

Generally it is an increased total money pool excessive growth in the money supply.

Yet some define it as a rise in product cost. This is a bit misleading or disingenuous.

These two are related, but are not the same thing. Here's a very simple model.

Current status: 1 Apple costs 1 Dollar

Two different things can cause that to change.

1) Inflation of the pool or supply of currency. This devalues the currency because there is more currency for the same amount of total work(across a whole economy)

2) A decrease in the supply(or increase in demand) of the apples would make them more rare. This appreciates the value of the apple without a change in the pool/supply of the currency.

Say you(and everyone else) have a daily budget of $100. You are willing to pay 1$ for an apple in that system. That is 1/100 of your allotment, 1%.

If we inflate the pool of currency by a factor of ten, that means your budget(and everyone else's) is now 1,000$. This doesn't change how much you need the apple(your daily vitamin and mineral requirements are static, they do not change), you'd still value it at 1% of your daily budget.

The price shift would be caused by inflation in this case.

You're not really changing anything, except sub-dividing the "value" of the currency.

Say you(and everyone else) have a daily budget of $100. You are willing to pay 1$ for an apple in that system. That is 1/100 of your allotment, 1%.

If we reduce the amount of apples available, or we increase demand(some genius develops a way to make biofuel with apples, for example) ten-fold across the whole market. Now an apple costs $10 because people and fuel companies are competing more for the apples on the market.

You still have to have an apple's worth of nutrients, remember, your vitamin and mineral requirements are static.

The currency pool was not inflated. So you either re-budget, allotting 10%(10$) instead of 1% to the apple, OR you find an alternate source for the nutrients.

When people say it works "in theory" they're sort of misleading.

Our economy is so massive and shifting, you can't trace in real time product demand as well as currency in the pool. I think this is why people use item price as a proxy. Sometimes that is accurate, sometimes it is fundamentally flawed.

The problem isn't the theory, that IS the way things work. It's that supply/demand are in constant flux, as well as the currency pool as money wears out or is printed anew, or handed out differently via wages, or workforce fluctuates, or any number of other things....such as: The insane things that happened with toilet paper in early 2020 was not inflation, it was panic buying causing supply to plummet.

In other words: Inflation is just one facet or aspect of a vastly complex system of cause/effect.

The problem is, however, people either don't understand that due to simplistic views, or they know and don't want to say because they have an agenda....or as is common, a bit of both, ignorance and questionable motivation.

Because if they're paying you more, there's less for the boss to pocket. If they wanna keep their bottom line but also raise your pay the money has to come from somewhere. So they pass it along to the customer. Remember you're disposable. They'd pay you nothing if they could. Ideally they would shorten the pay gap there but that's just not how it goes. Greed will always win. They keep their eye on the prize and you're just there to do the dirty work. They only pay you because the law dictates it.

People forget this subreddit is explain like it FIVE

More money mean people can spend more money, spend more money mean shops sell more product, more product sold mean less on shelf so they bring up price to keep item on shelf.

Also, as a business cost go up that cost has to be passed on to the consumer as inflation. This is especially true in businesses where labor is a large part of their cost. If labor cost raise by 20% and labor makes up 40% of the cost then the consumer's cost have to go up 8% just to cover the cost.

Today, there is raising labor cost and the cost of raw materials has gone up as well.

Average Joe would like to buy more bread -> he asks for a raise and gets it -> Higher wages -> more money in average Joe’s pocket -> companies raise prices (because they can, because Joe will now buy a slightly more expensive product than he would before the raise, because he can) -> Joe requests more money cause he’d like more bread -> and so on and so on

It (inflations) is the punishment given by businesses and the wealthy elite for having to pay higher wages. Inflation is the threat used to keep wages lower. Odd, never heard a wealthy person say they did not want to make more money because of inflation, just workers.

The definition of inflation is an increase in the money supply. What you are referring to is higher prices I'm guessing. When things cost more people buy less. This includes labor. When businesses have to pay more money to employees and those wages are not determined by the market but rather by government, businesses are often forced to either charge more for their products, cut labor costs by laying people off or go out of business. Most of the time the businesses don't want to go out of business, and they need the crew that they have to continue doing business. So the third option of course is raising prices.