What is meant by the inflationary spiral?

What is meant by the inflationary spiral?

• A. The relationship between falling wages and falling prices.
• B. A policy that intentionally reduces inflation by raising rates.
• C. A temporary decline in prices due to excess supply.
• D. The wage-price spiral, where rising wages lead to higher prices and more inflation.

Answer: (D)

The inflationary spiral is a self-reinforcing loop between wages and prices. When wages rise, firms face higher labor costs and respond by raising prices. Those higher prices reduce workers’ purchasing power, so they push for even higher wages to compensate. That leads to further cost increases for firms, which pushes prices up again, and the cycle continues. This ongoing wage-price interaction can sustain inflation over time even if other factors fade. The description that matches this mechanism names the wage-price spiral: rising wages leading to higher prices and more inflation. The other scenarios describe deflation, outright policy actions to curb inflation, or a temporary price drop due to excess supply, none of which capture the reinforcing wage–price relationship.

The inflationary spiral is a self-reinforcing loop between wages and prices. When wages rise, firms face higher labor costs and respond by raising prices. Those higher prices reduce workers’ purchasing power, so they push for even higher wages to compensate. That leads to further cost increases for firms, which pushes prices up again, and the cycle continues. This ongoing wage-price interaction can sustain inflation over time even if other factors fade.

The description that matches this mechanism names the wage-price spiral: rising wages leading to higher prices and more inflation. The other scenarios describe deflation, outright policy actions to curb inflation, or a temporary price drop due to excess supply, none of which capture the reinforcing wage–price relationship.