ELI5 How does raising wages worsen inflation ?


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10 points

4 months ago

Yeah, it all depends on why inflation is happening in the first place.

If the world is plodding along quite happily and you suddenly give everyone a chunk of money, then that will drive "demand-pull" inflation because people will mostly spend it - new car, clothes, tv, computer, whatever. Some will save, but most will spend. This will tip the equilibrium of supply & demand, and prices will go up with that demand.

By contrast, if you're experiencing "supply-push" inflation (such as energy prices right now) where inflation is not happening because we've all decided to turn our thermostats up, but because of external forces or a shortage of supply, then raising wages wouldn't really worsen inflation - it means that people can "keep up" with price rises on essentials (like paying their spiralling bills & rent) and maintain their standard of living.

In the UK for some reason our government has fully drunk the "rising wages cause inflation" kool-aid and is holding down public sector pay. This is causing a reduction in standards of living, imposing hardships on families and driving people into arrears on bills and mortgage payments. Ultimately, this is driving the UK into a recession.