Collective bargaining rounds with high inflation: is the wage-price spiral now threatening?

Inflation rises and rises. In the forthcoming wage rounds, the unions are demanding compensation. Is there a threat of a spiral of higher wages and even higher inflation like in the 1970s?

The calls from the unions are loud these days. It doesn’t matter whether it’s security staff at German airports or in the chemical and pharmaceutical industry: Everyone is demanding more money in view of rising inflation rates in Germany and many people who now have to dig deeper into their pockets for many things in everyday life.

On the financial markets, stock market professionals have long assumed that wages could rise soon. That is also justified, says Karsten Junius, chief economist at the Swiss bank J. Safra Sarasin: “We have a strong economy, we have higher inflation rates and we have a very, very tight labor market where many companies cannot get the necessary workers, that they need.”

A phenomenon that builds up over time?

The danger here: wage increases of five or more percent could in turn prompt companies to raise their prices. That could set off a dangerous spiral: the so-called wage-price spiral. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, does not yet see this danger. The wage-price spiral is then a nightmare if it is a period of four or five years.

“Higher prices lead to higher wages, then the companies say: But now we have to raise prices even more because wages have risen. Then the unions say: Now we need higher wage increases again. And then that spreads to many, many years,” explains Fratzscher the phenomenon. This was the case in the 1970s, when higher wages and rising prices continued to fuel each other as a result of the oil crisis. But the trade unions have also learned from this.

Unions ready to compromise, ECB under pressure

The war in Ukraine makes everything much more difficult today. It is unclear what the consequences will be for German companies, which is why the industrial union for mining, chemicals and energy is willing to compromise. “This part of the uncertainty can also be bridged financially in such a way that it is not defined for the future, but in the form of energy subsidies, for example,” says Ralf Sikorski, chief negotiator at IG Bergbau-Chemie-Energie. Many economists also believe that one-off payments and demands that are not immediately fixed for the next few years are a solution to reduce the risk of a wage-price spiral.

The situation for the European Central Bank (ECB) is delicate. Critics have long been calling for the central bank to intervene in view of an inflation rate of 5.9 percent in the euro area. The ECB is also keeping a very close eye on wage developments. Because if the increases are too high, inflation in the euro area could continue. ECB Vice President Luis de Guindos demands that politicians must also make their contribution. There have long been discussions in this country about relief when refueling – the only question that remains is whether these measures are sufficient to get inflation under control.