What economic phenomenon can result from prolonged high inflation?

Prolonged high inflation can lead to wage stagnation. When inflation consistently outpaces wage growth, the purchasing power of consumers decreases. Despite potentially seeing nominal wages rise, if these increases do not keep pace with inflation, employees may find that their real wages—the amount of goods and services they can buy with their income—do not improve or may even decline. This can create a situation where workers do not feel their compensation reflects the rising costs of living, leading to a stagnation in wages over time.

In such an environment, employers may resist raising salaries substantially because of increased costs associated with doing business during inflationary periods. As a result, while some may experience nominal increases in pay, it does not translate into better economic well-being, reflecting wage stagnation despite the ongoing inflationary pressures. Understanding this dynamic is crucial, as it highlights the challenges that high inflation poses to real earnings and overall consumer confidence.