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Return of cost-push inflation may lead to stagflation
Like Covid-19, transitory price shocks are contagious. They spawn wage demands and further price hikes among hard-hit workers and businesses. Even when a transitory shock is reversed, the final price increase is a multiple of the first, determined by an inflationary ‘R’. This measures the retaliatory recapture of lost real income. If half the initial and subsequent real income losses are recaptured by wage and price increases (R=0.5), price increases end up double the initial shock. If two-thirds are recaptured (R=0.67), they triple. If R=1 or more, an exponential wage-price spiral is triggered. The consequential ... (full story)