Inflation Debate Must Be Grounded in Evidence
10. June 2026Inflation Debate Must Be Grounded in Evidence, Not Myths
At a recent seminar hosted by VR, the Commercial Federation of Iceland (LÍV) and the Fagfélögin, VR economist Viðar Ingason presented research on the relationship between inflation, prices and wages. His presentation challenged the widely held view that wage increases are the primary driver of inflation, highlighting evidence that points to a far more complex reality.
Wages Are Not the Main Driver of Inflation
According to Ingason, the claim that wage growth is the principal cause of inflation is not strongly supported by economic research. While wages are undoubtedly an important cost for businesses, both Icelandic and international studies suggest that other factors, including housing costs, food prices and input costs, often play a more significant role in driving inflation.
He argued that inflation frequently arises when businesses seek to protect profit margins while employees seek to maintain their living standards. These competing objectives can create upward pressure on both prices and wages. Rather than a simple one-way relationship, inflation and wage growth often influence one another.
Inflation Often Precedes Wage Growth
A key theme of the presentation was the direction of causality between wages and inflation. Research reviewed by Ingason indicates that inflation is more likely to precede and predict wage growth than the reverse. As prices rise, employees seek higher wages to protect purchasing power, which can then contribute to further price adjustments.
Ingason stressed that this perspective deserves greater attention in public debate. Discussions that focus solely on wage increases as the source of inflation risk oversimplifying a far more complicated economic process.
The Impact of Wage Increases May Be Smaller Than Commonly Assumed
International research presented at the seminar suggests that the effect of wage increases on prices is often more limited than many assume. Studies cited by Ingason found that a 10 per cent increase in minimum wages resulted in only modest increases in food prices and restaurant costs.
He also noted that businesses tend to adjust prices more frequently than wages change, indicating that pricing decisions are influenced by a range of factors beyond labour costs alone.
At the same time, Ingason emphasised that wage increases do have an impact on prices and that excessive wage growth cannot be justified without corresponding productivity gains. The evidence, however, suggests that wage increases are only one factor among many affecting inflation.
Exchange Rate Movements Have a Significant Effect
The presentation also examined the role of the Icelandic króna in shaping inflation. Ingason pointed out that when the currency weakens, higher import costs are passed on to consumers relatively quickly, particularly in the prices of food and beverages. However, when the króna strengthens, the resulting price reductions are often far smaller.
Research by the Central Bank of Iceland indicates that a 1 per cent depreciation of the króna can lead to a 0.9 per cent increase in food and beverage prices. By contrast, a 1 per cent appreciation of the currency results in price reductions of only around 0.2 per cent.
A Valuable Contribution to the Economic Debate
The central conclusion of the seminar was clear: the relationship between wages and inflation is considerably more complex than is often portrayed. Research suggests that the impact of wage growth on inflation is generally modest and that inflation itself is frequently a key driver of wage demands. At the same time, factors such as housing costs, import prices and exchange rate movements play a major role in shaping price developments.
The seminar provided an important contribution to the debate on inflation and living standards, highlighting the need for economic policy discussions to be informed by evidence and research rather than simplified assumptions.
Source: RÚV (Icelandic)