Would a wage/price spiral cause inflation to get out of control?
Union leaders have derided calls by government ministers for wage restraint, believing their members must close the gap with rising inflation or risk a severe cut in living standards.
One of the main reasons cited by officials in the Bank of England and the Treasury for wage restraint is the threat of a wage/price spiral and the fear that this ratcheting effect will make double-digit inflation a permanent feature of life in the UK.
There are 32.7m people in employment in the UK and if all of them receive pay rises that match the current inflation rate of 9%, it will prove to be a crippling bill for employers, including local and central government. Figures published on Wednesday could show the consumer prices index (CPI) heading closer towards the BoE forecast of 11% in October.
The wage/price spiral is an academic concept based on a theory of inflation expectations. A string of papers by economists in the 1960s and 1970s, when inflation was thought to be a constant threat, argued that once households expect inflation to be high for the foreseeable future they will demand higher wages. Businesses will be forced to pass on the cost of higher wages, which will create a second round of rising prices.
With higher wages chasing higher prices, the concern is that pretty soon the country will find itself, if not with 1,000% hyper-inflation, then with a level of wages that makes most British exports unaffordable in foreign markets.
However, the concept of inflationary expectations is based on a theory rather than empirical evidence. And it stems from an era when workers, a large number of them working in state-owned industries, had a good deal more power than they enjoy today.
In 1975, when inflation hit 25%, wage rates for manual
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