The wage-price spiral: what has to line up for the loop to close

A wage-price spiral is a self-reinforcing feedback loop in which rising pay pushes up companies' costs, companies pass those costs on in their selling prices, a more expensive consumer basket drives workers to demand compensation, and the cycle repeats. The key word here is "self-reinforcing": a one-off pay rise is not a spiral. The loop closes only when several conditions coincide: the labour market is tight enough that workers can demand higher pay and get it, companies have the pricing power to pass a rising wage bill on to customers, and monetary policy is loose enough for demand to absorb the new prices. Break any one of these links and instead of a spiral you get a one-off shift in the price level that fades on its own.

What actually turns in the loop

What matters economically is not wages as such but unit labour costs — labour spending per unit of output. If pay rises in step with productivity, unit labour costs stay flat and there is nothing to pass on into prices: the company pays more, but it also produces more. The spiral begins where pay outpaces productivity and the gap has to be closed somehow — either out of margins or on the price tag.

The second link is pricing power. In a competitive industry with spare capacity, rising wages eat into profits rather than lifting the price list: whoever raises prices loses customers to a rival. In an industry with concentrated supply and inelastic demand, pass-through is almost complete and fast. That is why the same macroeconomic picture means different things for different issuers: margin compression for some, preserved margins for others. You can track this through the trend in profitability in companies' quarterly reports — cost of sales and selling expenses respond to the labour market earlier than revenue does.

The third link is inflation expectations. As long as households and businesses believe prices will return to target, wage demands form around that target. Once that belief is lost, both sides start building future price growth into contracts in advance — and inflation becomes a self-fulfilling expectation. This is precisely the link the central bank fights for, and precisely why the regulator's communication carries as much weight in macroeconomics as its actions.

Why a spiral is the exception rather than the rule

The classic case usually cited dates from the seventies of the last century, when union agreements that automatically tied pay to a price index were widespread and monetary policy validated each new round with money creation. Without that kind of automatic indexation, the loop breaks on its very first turn: nominal wage growth is eaten up by inflation, real incomes fall back to where they were, and the pressure dissipates. The practical conclusion follows: the hallmark of a spiral is not high inflation or rapid wage growth taken separately, but their sustained synchronisation in the absence of productivity growth.

The Russian specifics: where indexation is written into law

In Russia, part of the indexation mechanism is enshrined in regulation. Article 134 of the Labour Code obliges employers to ensure an increase in the real level of wages, including indexation in line with rising consumer prices; budget payments and social obligations are also indexed under rules tied to price dynamics. This does not make a spiral inevitable, but it does speed up the feedback: part of the wage bill responds to inflation automatically rather than through negotiation. How this obligation works and why it matters for macro analysis is covered separately: wage indexation.

The second factor is a labour shortage of demographic origin. When the supply of labour is constrained structurally rather than cyclically, employers compete for people not through productivity but directly through the pay rate, and unit labour costs rise even when demand is weak. Current readings for inflation, expectations and wages are published and updated regularly — see the macro news feed and the glossary in the reference section; this piece deliberately cites no specific figures, because they change from one release to the next.

What this means for a portfolio

• Debt market. While the regulator keeps policy tight to break the loop, the yield curve reflects not only current inflation but also how long the fight against it is expected to last. Floating-rate instruments and inflation-linked issues are different answers to different scenarios; the structure of issues can be seen on the OFZ page, and a broader cross-section in the bonds section.
• Equities. The winners are businesses with a low share of labour in their cost base and the ability to pass on costs; the losers are labour-intensive services and retailers with price-sensitive customers. Sectors are easy to compare on the equity market page.
• Dividends. Margin compression reaches payouts with a lag, through the profit of the reporting period, so the dividend calendar shows a past decision, not future sustainability.

An honest caveat

Whether the spiral in the Russian economy has or has not closed can only be asserted from public data with caveats: a diagnosis requires a simultaneous picture of wages, productivity, expectations and profitability, tracked over time and free of statistical revisions. The right stance for an observer is to watch not any single figure but whether pay and productivity are diverging, and whether the regulator validates each new round with looser policy. No return is promised under any of these scenarios here, nor can one be.