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Federal Reserve System, Inflation, and Wage-Price Spiral

One important thing learned from the episode of Bloomberg’s Stephanomics podcast is how the Federal Reserve System needs to monitor the economic situation for specific indicators when shaping monetary policy. In this particular episode, the podcast’s host Stephanie Flanders (2021) and her guests discuss what indicators could prompt the Federal Reserve System to reconsider its currently lenient stance on inflation running above the two percent target. According to the podcast, an important indicator that can cause a policy shift toward a more stringent monetary policy would be the wage-price spiral. The concept refers to the situation when workers’ increasing salaries prompt them to procure more goods and services, which fuels price growth, which, in turn, leads to demands for even higher wages (Flanders, 2021). The podcast identifies this indicator as a signal that inflation is beginning to run out of control, and stricter measures are needed to curb it.

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This knowledge is directly related to the Federal Reserve’s function as the central bank, which means its primary responsibility for maintain a healthy inflation rate. Since it is the Federal Reserve System that ultimately controls the money supply, it is its job to prevent it from becoming too cheap. The main challenge is identifying economic indicators that necessitate a shift in policy, and, according to the podcast, the wage-price spiral is one for inflation running too high (Flanders, 2021). Hence, the concept is directly related to the Federal Reserve’s function of issuing money and shaping the broader economic context.

Colloquial understanding of price growth is almost entirely negative because it limits people’s potential access to goods and services. The podcast, though, reiterates the long-standing economic wisdom that some inflation is better than none. If anything, it indicates that the latest framework put into place suggests that the central bank should be more tolerant of inflation running slightly above its two-percent target (Flanders, 2021). Thus, based on the information reiterated above, society should grow more tolerant of controlled inflation and correspondent price growth.

Reference

Flanders, S. (Host). (2021). The next recession could come courtesy of the Fed [Audio podcast episode]. In Stephanomics. Bloomberg. Web.

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StudyCorgi. "Federal Reserve System, Inflation, and Wage-Price Spiral." October 16, 2022. https://studycorgi.com/federal-reserve-system-inflation-and-wage-price-spiral/.

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StudyCorgi. 2022. "Federal Reserve System, Inflation, and Wage-Price Spiral." October 16, 2022. https://studycorgi.com/federal-reserve-system-inflation-and-wage-price-spiral/.

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StudyCorgi. (2022) 'Federal Reserve System, Inflation, and Wage-Price Spiral'. 16 October.

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