In these days marked by inflation, two articles from The Economist allow us to learn from past episodes of accelerating prices. Also, a paper from IMF economists helps to understand wage-price evolution since the 1960s.
One article looks at the 1980s and retains three lessons: first, inflation can take a long time to come down; second, defeating inflation requires the participation not just of central bankers, but other policymakers too; third, it will come with huge trade-offs. (page 66 of the December 3rd edition)
The other analyses "The great inflation of the 1500s...", the "chaos" associated to it and that lasted many decennies. (pages 18 and 19 of the Holiday specials, December 24th edition). The conclusion: " No matter the cause, societies that let inflation set in should expect more than just their living standards to be debased." You can expect, inter alia, "...weaker states and a debt crisis."
Still on inflation, a working paper from IMF economists titled "Wage-Price Spirals: What is the Historical Evidence?" (WP/22/221) offers an interesting conclusion:
"Wage-price spirals, at least defined as a sustained acceleration of prices and wages, are hard to find in the recent historical record. Of the 79 episodes identified with accelerating prices and wages going back to the 1960s, only a minority of them saw further acceleration after eight quarters. Moreover, sustained wage-price acceleration is even harder to find when looking at episodes similar to today, where real wages have significantly fallen. In those cases, nominal wages tended to catch-up to inflation to partially recover real wage losses, and growth rates tended to stabilize at a higher level than before the initial acceleration happened. Wage growth rates were eventually consistent with inflation and labor market tightness observed. This mechanism did not appear to lead to persistent acceleration dynamics that can be characterized as a wage-price spiral.
It is still too early to say whether the recovery from the COVID-19 pandemic will play out like these past similar episodes. However, an important takeaway from the analysis is that an acceleration of nominal wages should not necessarily be seen as sign that a wage-price spiral is taking hold. Indeed, history suggests that nominal wages can accelerate while inflation recedes from high levels. In fact, on average, this has happened after similar macroeconomic episodes in the past."
