Establishing a credible anchor by focusing on predictability When the original inflation-reduction targets were announced in early 1991, the Bank was not relying on a credibility effect to reduce inflation. And subsequent studies have shown that this was the appropriate assumption—there was no evident reduction in the cost of disinflation arising from credibility.
Increases in compensation might be offset by higher labor productivity or absorbed by a narrowing of firms' profit margins rather than passed on to consumers in the form of higher prices; in these circumstances, gains in nominal compensation would translate into gains in real compensation as well.