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In early 2024, NovaCorp's chief economist Mira noticed something alarming in the quarterly survey: 78% of the firm's 12,000 employees expected inflation to exceed 8% over the next year. Actual inflation sat at 4.2%, but that number was about to become irrelevant. By March, the union negotiator Kai presented demands for 9% wage increases across all divisions, citing the survey results and rising grocery costs. NovaCorp's board, facing a tight labor market, agreed to 7.5%. Within weeks, three competing manufacturers matched or exceeded that figure to retain talent. Mira watched the math cascade. NovaCorp's labor costs jumped $43 million annually. To preserve margins, the pricing team raised product prices by 6.8% in Q2. Suppliers, facing their own wage pressures, hiked input costs by 5.3%...
Popular framing: Greedy unions and weak management broke the wage-price equilibrium.
Structural analysis: Expectations of inflation are reflexive — beliefs about future prices change current wage and pricing behavior, which validates the original beliefs. Each actor's rational best response (demand the wage, raise the price, hike the input cost) destabilized the old equilibrium without producing a new one, because in this prisoner's-dilemma geometry no single actor could absorb the cost of holding still. The expectation didn't predict inflation; it manufactured it through the loop, and no central authority had the lever to break the spiral.
Attributing the spiral to worker expectations or union demands misses that the same beliefs in a slack labor market or a more competitive industry would not have propagated. The popular framing focuses on the match that lit the fire while ignoring the room full of accelerant — market structure, competitive dynamics, and the absence of coordination mechanisms that would have allowed collective restraint.
