SL risks wage-spiral inflation amid trade union actions for higher pay

• Workers have begun demanding higher wage to maintain their living standards in anticipation of even higher prices
• This could increase disposable income, hence increased demand for goods and services in economy 
• Pandemic-induced supply chain restrictions and excessive money printing identified as main reasons for rise in prices
• SL’s inflation rose to 9.9% in Nov. with food inflation rising 17.5% 

Sri Lanka, which saw decade-high prices in November amid supply chain issues and excessive money printing, is now risking wage-spiral inflation, as workers are going on strike demanding higher wages to fight against the 
soaring prices. 

Wage-price spiral is a phenomenon where workers demand higher wages, feeling the increasing cost of living to maintain their higher wages. It leads to higher disposable incomes and hence, higher demand compared to the available stock of goods and services in the market, leading to demand-driven inflation. 

This cycle never ends, as workers continue to demand higher wages in anticipation of higher inflation in the economy to maintain their living standards. 

Sri Lanka appears to have already entered this era of wage-spiral inflation, as several powerful trade unions in the country have started demanding higher wages.

While the teachers’ and principals’ trade unions won a sharp wage increase from January, after more than a three-month-long agitation and protest, another wave of trade union actions by postal services to railways to doctors, all of which are linked to their pay, are threatening to launch massive strikes unless their grievances are met.

According to ICRA Lanka Limited, which tracks the wages in the country, the nominal wage rate index of the informal private sector had continued to recover and surged by 17 percent in October from a year ago.
In November, Sri Lanka’s consumer prices measured by the Colombo Consumer Price Index rose by 9.9 percent, the highest since July 2012 and the food prices soared by 17.5 percent.

While the supply chain troubles caused by the pandemic-induced interruptions in manufacturing and shipping delays have caused part of the price pressures, the robust consumer demand remained throughout the pandemic, which was made possible by massive amounts of stimulus money printed by the world’s central banks, including Sri Lanka’s, sent the prices from energy to food and clothing to automobiles significantly upwards. 

In the United States, consumer inflation in November hit a 39-year high of 6.8 percent over the same period last year, prompting the Fed to speed up its tapering programme in preparation to raise interest rates. 

According to economists, what could end wage-spiral inflation is the raising of interest rates, which in turn increases the cost of money and thereby cool down the demand for goods and services. Also, such wage-driven inflation could also be offset or at least mitigated by linking the wage increases to productivity growth, enabling the employer, who grants the wage hike, to afford the wage increase without passing it down to the consumer. 

Productivity growth is something which hardly happens in Sri Lanka; hence, it is totally out of the equation. This will leave policymakers with only one choice, which is to jack up interest rates to ease the demand in the economy, so that the prices would gradually cool down.  The acute liquidity shortages in both foreign exchange and rupee markets suggest that turning hawkish by the Central Bank is no longer a choice. 

This is also reflected by the slight increases in the yields of the shorter tenure treasury bills at last week’s primary auction. The three-month bill yield jumped to 7.71 percent, from 7.24 percent in the previous week while the six-month bill yield rose to 8.10 percent, from 8.03 percent. However, the benchmark one-year bill yield eased to 8.02 percent, from 8.06 percent.