The International Monetary Fund (IMF) has said that higher energy prices were contributing to increased wage demand globally.
In a new report on how ‘Energy shocks amid rapid inflation could fuel faster wage gains’, the IMF said with higher energy price driving up prices of goods and services, resultant inflation has reduced people’s purchasing.
“Billions of consumers around the world are seeing higher oil prices seep into the cost of living and wages. Filling the gas tank soon starts to cost more when crude prices climb, as does airfare, but higher energy costs also boost prices for all the products on store shelves.
Workers seek higher wages to compensate for a loss in their purchasing power,” the report said.
The global development finance institution noted that these could have second-round effects leading to further raised prices.
According to the Fund, if the demand is sustained, it could lead to a wage-price spiral with wage growth and inflation rising over an extended period.
“When overall inflation is already high, like it is now, wages tend to increase by more in response to an oil price shock.
“The larger the second-round effects, the greater the risk of a sustained wage-price spiral through a feedback loop between wages and prices. If large and sustained, oil price shocks could fuel persistent rises in inflation and inflation expectations, which should be countered by a monetary policy response,” the report said.
In a survey conducted in 39 European countries, the Bretton Woods Institute, noted that the risk tend to be greater especially with overall inflation rate already high.
For example, wages increase by 0.4 percent when underlying inflation is higher than 4 percent, one year after a 10 percent increase in oil prices, but increase by less than 0.2 percent otherwise.
To head off such a risk, the Fund said, central banks will need to respond firmly with measures that will tame inflation.
According to the report, central banks should remain adequately vigilant as current high inflation could still cause higher compensation for the cost of living than usual but need not morph into a sustained increase in inflation.
“When overall inflation is higher, people tend to be more alert to price increases of all stripes and seek higher compensation for oil price rises.
“Of concern is how current high inflation could increase the risk of energy prices causing sizable second-round effects an d a sustained increase in inflation, which includes pushing up inflation expectations,” the Fund said.
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