Built-in inflation

• Inflationary expectations play a role because if workers and employers expect inflation to persist in the future, they will increase their wages and prices now. This means that inflation happens now simply because of subjective views about what may happen in the future. Following the generally accepted theory of adaptive expectations, such inflationary expectations arise because of persistent past experience with inflation.
• The price/wage spiral is the adversarial nature of bargaining about wages in modern capitalism. It is part of the conflict theory of inflation. Workers and employers usually do not get together to agree on the value of real wages. Instead, workers attempt to protect their real wages from falling in response to inflation by pushing for higher money wages. Thus, if they expect price inflation – or have experienced price inflation in the past – they push for higher nominal wages. If they are successful, this raises the costs faced by their employers. To protect the real value of their profits, employers then pass the higher costs on to consumers in the form of higher prices. This encourages workers to push for higher nominal wages because these price rises raise their cost of living; so the inflationary cycle reinforces itself.