How will rising wages cause inflation?

Question

Why are stock prices going down on the news of rising wages? Isn't this good news for the economy?

Answer 1

That sort of news always depends on where we are at in an economic cycle. But a simple answer to your question is that now there are more dollars chasing fewer goods. Rising wages would be good in a recession environment, but because we are worried about inflation, rising wages are helping to fuel inflation. Hope this helps.

Answer 2

Rising wages do not necessarily cause inflation. If wage increases are matched by productivity increases there will be no inflationary impact. Even when rising wages are said to be causing inflation it can be argued that they are tthe result of inflation rather than the cause.

Inflation is primarily a monetary phenomenon, the result of inflating the money supply. This is demonstrated by the ability of the Federal Reserve and other central banks to exercise pretty good control of inflation over the past 30 years, through their power over money supply

Anything in oversupply reduces its value including money. Reduced value of money forces nominal prices of goods, services, and wages upwards [inflation].

Of course serious shortages of significant resources increase price for that commodity i.e inflates the price.Depending on the importance of the commodity this may force other prices upwards as well, [oil and oil related products are an example], and be a source of general inflation.

Serious lablor shortages can cause wage inflation and if significantly broad could impact general inflation. Labor shortages usually occur in selected industries, or in specific work categories, and are not sufficient to cause an inflation spiral.

When monetary policy errors and there is too much currency available for the economic requirement, an inflation spiral starts and increased prices and wages feed on each other.

I believe the correct answer to the question is that rising wages are rarely the prime cause of general inflation. Wage increases are more likely the result. Increasing wages do, however, stoke inflation once the cycle is in motion as higher wages force higher prices.

Answer 3

when wages are rising that means the Employers have to pay more and that will mean less profit and more expense so they will lay people off and small business will suffer because they can't handle the increase. See If you raise minimum wages than every ones else wants a wage because they can't live on just over minimum and so on everything goes up than prices rise to pay for the increase and some business will go under.

Answer 4

Rising wages have to be paid for, and there is only one place that ultimately comes from - the customer.

For example, if you pay a car factory worker more money, the price of the product must increase to cover that extra cost. If it does not, the company's profit and investment ability will be compromised, which may eventually lead to a loss of jobs.

If the price of a product increases, the potential buyers will demand higher wages to pay for it, and there you have the beginning of the vicious circle.

Answer 5

When wages go up a store's cost goes up and prices go up. When stock prices fall people lose money. How can this be good news? The purchase price means nothing when buying stock. What really matters it that the value goes up after purchase not down.

Answer 6

In America, consumers spend more than they earn (negative savings rate). Higher wages lead to more spending. The classic definition of inflation is "Too many dollars chasing too few goods"
If the federal reserve detects inflation, it raises interest rates. Higher interest rates are bad for stocks because bonds are 'safer' and will pay more as rates rise.