The thrust of our response to the wage-price spiral argument is that even if inclusive growth policies, liberal fiscal entitlements and heightened inflation expectations – driven primarily by food inflation – trigger a wage-price spiral, it cannot be sustained in the absence of an accommodative monetary policy.
Admittedly, wage pressures, unaccompanied by productivity increases, start off as demand shocks, but soon transform to act more like supply shocks. 37. Like any other supply shock, exogenously imposed higher wages can be inflationary in the first round, but the bargaining power of labour will erode in time, and the necessary adjustment will take place to bring wages back in line with productivity levels.