The emergence of wage-price spirals: Implications for Monetary Policy Response

This paper examines the interaction between nominal wage dynamics and consumer price inflation in Uzbekistan, with the aim of assessing the risk of wage-price spirals in an emerging market context. Using quarterly data covering the period from 2007 to 2025, the analysis investigates whether wage and price developments reflect self-reinforcing feedback mechanisms or primarily capture compensatory adjustments driven by external and institutional factors. The empirical framework combines cointegration analysis, conditional Granger causality tests, and a vector error correction model (VECM), complemented by impulse response functions to characterise the dynamic transmission of wage and price shocks. The results establish the presence of a stable long-run equilibrium between wages and prices, with adjustment operating exclusively through wages rather than prices. Granger causality tests reveal a clear unidirectional pattern: consumer prices drive nominal wages, while wages do not feed back into prices in either the short or long run. Impulse response analysis confirms that wage shocks generate only a moderate and gradual price response, whereas price shocks produce a persistent wage adjustment consistent with compensatory indexation. These findings do not support the existence of a self-sustaining wage-price spiral in Uzbekistan. Instead, wage dynamics appear to reflect institutionally driven responses to inflation, shaped by centralized public-sector wage setting, while exchange rate pass-through emerges as the dominant driver of price dynamics.