An inflation expectations feedback loop drives persistent price increases when escalating costs prompt workers to demand higher wages, continuously accelerating new price gains faster than interest rates can suppress demand. When playing higher supply cost pressures, the observed Consumer Price Index Level rises from 234 to 302 at step 15. These illustrative values demonstrate how self-reinforcing market expectations overpower dampening policies unless monetary tightening aggressively contracts overall economic activity.
Key takeaways
- Raising Baseline Supply Cost Pressure from 4 to 8 leaves Consumer Price Index Level at 302 at step 15 instead of 234.
- Increasing Central Bank Policy Rate from 2 to 6 lowers Consumer Price Index Level to 165 at step 15 instead of 234.
- Consumer Price Index Level expands more rapidly in this model when higher price markups prompt larger wage demands that feed back into subsequent pricing.
- Macroeconomic planners should evaluate whether interest rate dampening is sufficient to offset incoming cost pressure before wage feedback accelerates.
Why does wage-price feedback matter to macroeconomic planning?
Planners evaluating macroeconomic price stability face a continuous trade-off between allowing input cost surges to pass through into broad pricing and relying on monetary tightening to contract aggregate demand. In this playable model, raising baseline supply pressures drives the outcome stock named Consumer Price Index Level to an illustrative value of 302 at step 15, whereas raising the policy rate lowers it to 165 compared to the baseline result of 234.
These figures represent illustrative values inside a simplified quarterly feedback structure rather than real economic forecasts. The model demonstrates how an expectation dynamic between consumer price levels and worker compensation claims can compound price increases over successive periods.
How do the policy and supply levers shift the price index?
The first lever, Baseline Supply Cost Pressure, sets the exogenous growth in basic production costs entering the economy each quarter. In the baseline setting, this lever is set to 4, which leaves Consumer Price Index Level at 234 at step 15. When you shift this lever to 8, the price index reaches 302 at step 15.
Looking at early and middle stages reveals how cost increases compound. At step 1, the baseline shows 104 while the shifted setting begins at 108, widening by step 8 to 150 against 183.
The second lever is Central Bank Policy Rate, which governs the intensity of demand dampening each quarter. In the baseline configuration, this rate begins at 2, ending at 234 at step 15. Setting this policy lever to 6 drops Consumer Price Index Level to 165 at step 15.
Tracking intermediate intervals reveals how policy restraint accumulates over time. At step 1, the price index stands at 100 with the higher rate, reaching 117 at step 8 instead of 150 under baseline conditions.
The card also has two more sliders. Consumer Price Index Level sets how much the price index pool holds before step 1: 100 in the baseline, adjustable from 50 to 200. Worker Wage Demands sets how much pay demand has already built up before step 1: 10 in the baseline, adjustable from 0 to 50.
How do the parts push on one another in the model?
The structure relies on an interconnected loop connecting prices and wage claims across quarterly steps. The source named Price Markups channels additions into Consumer Price Index Level, fueled by Baseline Supply Cost Pressure and accumulated compensation claims. Simultaneously, Demand Dampening acts as an outflow that absorbs inflationary pressure, scaled by Central Bank Policy Rate.
Feedback occurs through Worker Wage Demands, which starts with 10 units. As the price index grows from its initial 100 units, Wage Adjustment feeds new claims into Worker Wage Demands. These accumulated claims scale the markup flow, reinforcing further price expansion unless demand dampening offsets it.
What does this result mean for macroeconomic stability?
In this model, holding policy rates low during persistent supply shocks allows wage demands to reinforce markup growth quarter after quarter. A decision maker watching price changes must look first at whether wage adjustments are accelerating, because wage claims amplify initial cost shocks into wider index growth.
The findings show that monetary tightening restricts the final price level by steadily removing pressure through the dampening outflow. Planners should watch for whether interest adjustments are strong enough to outpace the compounding loop between worker claims and retail markups.
What does the model leave out?
Real systems are more complicated than any model, and this structure relies on several specific simplifications. It uses a fixed time step where each step equals one quarter, and it assumes constant baseline rates throughout the entire horizon. The framework omits additional sectors, financial market channels and alternative supply dynamics beyond its two explicit pools and four levers.
Where does the topic come from?
This playable model was inspired by the publication Accredited official statistics: Consumer price inflation, UK: May 2027, published by Office for National Statistics (GOV.UK) on 8 October 2026. The scenario presented here, along with all associated numbers, forms an illustrative model scenario exploring feedback between wages and consumer prices.
Can you test alternative settings yourself?
You can explore how these forces interact by adjusting the levers directly during Play. Select different settings for Baseline Supply Cost Pressure and Central Bank Policy Rate to see where the balance between wage growth and dampening settles across fifteen quarters.
The parts of the model
The question it asks: How does an inflation expectations feedback loop drive persistent increases in the consumer price index despite interest rate dampening?
- Price Markups · Source
- Generates price increases pushed by baseline supply costs and wage pressures.
- Consumer Price Index Level · Pool
- Tracks the overall consumer price index over quarterly Play steps.
- Demand Dampening · Sink
- Absorbs inflationary pressure through monetary policy tightening.
- Wage Adjustment · Source
- Generates increases in worker wage demands driven by higher consumer prices.
- Worker Wage Demands · Pool
- Stores accumulated worker wage claims that feedback into corporate pricing.
- Baseline Supply Cost Pressure · Lever
- Interactive lever setting baseline exogenous supply cost growth per quarter.
- Central Bank Policy Rate · Lever
- Interactive lever setting the quarterly interest rate dampening intensity.
Assumptions and limits
- Each step of Play represents one calendar quarter.
- Worker Wage Demands directly scale the Price Markups Flow via cost-push mechanisms.
- Central Bank Policy Rate proportionally increases the Demand Dampening Flow to suppress the price index.
- All initial numeric values are illustrative.
A teaching model with illustrative values; each Play is a scenario, not a forecast.
Sources
Topic source: Office for National Statistics, GOV.UK. Contains public sector information licensed under the Open Government Licence v3.0.
About this model
Machinations makes these models with AI from a public source, and each one is a teaching scenario: its numbers are illustrative values chosen for the model, not measurements or forecasts. You can open this diagram in the Community to remix it and change it.