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Inflation Drives Wages Down, Not Up

The ‘wage-price spiral’ is a myth. It’s much easier to raise prices than wages.

Federal Reserve Chairman Jerome Powell speaks at a House Committee on Financial Services hearing in Washington, Dec. 1, 2021.Photo: Amanda Andrade-Rhoades/Associated Press
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The Labor Department released a report Friday showing that worker pay increased about 4% in one year, the fastest rate in two decades. This led to predictable alarm that the U.S. is facing a “wage-price spiral,” in which higher wages push up prices, which lead to demands for still-higher wages, and so forth. But the wage-price spiral is a false and antiquated economic idea that refuses to die and keeps generating bad policies.

Wages don’t spiral up during inflation; they spiral down as higher prices eat away paychecks. The dollar amounts on paychecks will rise, but not fast enough for their real value to outpace inflation. The recent stories of wage increases came not long after the government announced prices increased 7% in the past year. A more accurate headline for coverage of Labor’s report last Friday would have been “Real Wages Drop 3%.”

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