I BELIEVE it a safe guess that wage-price policy will assume, in the 1970's, a position of coordinate importance with employment policy, both in the United, States, and in most other industrialized countries which rely on reasonably free markets. Committed, as they are, to the maintenance of full employment, these economies will remain prone to a degree of intermittent and creeping inflation which, although modest by comparison with celebrated inflations of the past, will nevertheless be exceedingly visible. Even if the costs in economic terms of such inflation may be judged tolerable, I doubt that its costs in social and political terms will permit any government simply to ignore it, or to rely on policies that appear ineffective. Today's endemic inflationary problem is obviously no simple phenomenon. Its causes'> surely relate to fairly stable aspects of labor and product markets (of the sort analyzed by Phelps, Mortenson, Holt, Tobin et al.), the effects of which depend on the degree of resource utilization which we can assume will usually be high. Another important element is the dynamic mechanism through which current of price and income changes are generated from past events.1 But in addition to these basically economic elements, the process involves major sociopsychological and political aspects. My vision of the type of inflationary process which now concerns us sees it as essentially the by-product of a struggle over income distribution, occurring in a society in which most sellers of goods and services possess some degree of market power over their own wages or prices (in money terms). The extent of each firm's or union's power at any given time is affected by structural and market factors; the manner in which that power is used is affected by of what is happening, and by political attitudes and social norms. Market power is used both in an attempt to increase real incomes, and, defensively, in an effort to protect real incomes from past and expected increases in production or purchase costs. An inflationary process can be tripped off in any of a number of ways. And, once it begins, most increases in wages and prices are basically defensive made in an effort not to fall behind. Yet every defensive wage or price increase threatens the real incomes of other sectors, and prompts an endless chain of further defensive moves. Although some groups achieve relative gains and others experience loss of position during such a price-war spiral, the main effect is simply to raise the entire level of prices and money incomes. In my view, this model of an inflation-generating struggle to increase or protect income shares -although here grossly oversimplified provides a substantially meaningful description of wage and price behavior in a modern industrial economy. But what is most significant is that the problem it describes appears to have become aggravated in recent years, as the social norms regulating group behavior have for various reasons become more tolerant of -or even now encourage an increasingly aggressive use of market power. Moreover, there is an increasing sophistication of business and union leadership, along with better and prompter measurements of relative positioni.e., the perception-generating mechanism is altering. And recent experience with inflation has substantially heightened the sensitivity of most groups to actual or potential losses of relative position. For these reasons, there is a tendency to react more quickly, more fully, and frequently preemptively. The more prompt and complete are the defensive reactions to inflation, the faster is its rate that is, the more there is to defend against. 'I use the word perceptions rather than expectations. There has been debate whether the inflationary process basically involves efforts to catch up with past changes, to keep up with other current changes, or to anticipate future changes. Since any systematic explanation of expectations derives only from past and present events, the argument makes no operational difference. But, in fact, what influences current decisions is a complex perception of an on-going process, involving past, present, and future values. The perception-generating mechanism may not only be nonlinear, but also quite unstable.