Which of the following describes built-in inflation?

Built-in inflation refers to a situation where inflation is driven by wage increases and the expectation of future inflation. This type of inflation occurs when workers demand higher wages due to the rising cost of living, and businesses, anticipating these wage increases, raise prices to maintain their profit margins. This creates a feedback loop where the expectation of future inflation leads to higher wages, which in turn causes further price increases.

It's crucial to understand that this phenomenon often arises in an economy where inflation expectations are ingrained in people’s behavior. Businesses and consumers begin to act on the belief that prices will continue to rise, which perpetuates the cycle of inflation.

In contrast, built-in inflation is different from price stability caused by increased competition, government spending impacting inflation alone, or a decrease in wages leading to lower prices, as those factors do not inherently contribute to the wage-price spiral characteristic of built-in inflation. Thus, the correct answer captures the essence of this inflationary process effectively.