Most economists assume that behind an unrestricted war economy lurk the dangers of inflation. Although national income increases, so much of the country's productive effort is devoted to the manufacture of war goods that the number of articles available for civilian consumption necessarily diminishes. This gap between the available supply and the existing purchasing power has the effect of raising prices. Rising wages aggravate this situation because they increase production costs which are then passed on to the consumer in the form of higher prices, and because, by further increasing the purchasing power of the population, they increase the gap between demand and supply. This latter effect is especially true in a war economy, since the extra dollars are not earned in the production of consumer goods.
ASPECTS OF WAGE STABILIZATION BY THE NATIONAL WAR LABOR BOARD,
Mich. L. Rev.
Available at: https://repository.law.umich.edu/mlr/vol43/iss6/2