By: DanielXX Inflation is in the air, and Singapore has not been spared. Indeed, as one of the most open economies in the world, we are seen as particularly vulnerable, even a precursor to what the rest of the world will experience several months later due to our lack of subsidies for many common products that typically shield consumers of other countries from immediate price impact. Given the price pressure faced by people in their daily necessities as a result of imported inflation, it has become necessary to communicate the linkages between wages and prices. No less than two full ministers have come forward to explain the intricacies of inflation and why a wage-price spiral must not be allowed to develop --- which means wages must be controlled. I sympathise with them because it must be politically difficult to explain to people that their income cannot rise in-step with their expenditure. Before we go further, let's briefly look at what wage-price spiral means. Essentially, it is a classical inflation phenomenon where wages are allowed to chase prices upwards. Prices, in turn, will be positively influenced by rising affordability (rising wages) and hence its upward momentum is not checked, leading to a positive reinforcement cycle. In a sense, inflation begets further inflationary expectations. But let's look at it more closely. I am in no position to discuss it quantitatively, but let's reason things out qualitatively. Two key points on why I doubt a wage-price spiral will occur even if wages are allowed to rise: Read more...