Perceptions of an erosion of purchasing power may be reinforced by price increases being concentrated in frequently purchased consumer goods and services (right chart slide 17).
Second-round effects refer to the possibility that a transitory rise in inflation may lead to stronger wage growth if unions attempt to re-establish workers’ pre-pandemic purchasing power, which may subsequently lead to firms passing on higher wages to final consumer prices. Typically, central banks watch second-round effects with great caution, as they have the potential to alter the persistent underlying direction of inflation.