Just as the slowing in overall inflation in 1997 and 1998 contributed to a moderation in nominal wage demands, the higher overall inflation in 1999 and 2000 would be expected to boost nominal wage demands. But any rebound in nominal labor compensation could also reflect a catch-up to higher productivity growth.
If nominal compensation is just matching the higher productivity growth, this source of acceleration in nominal compensation would not itself be inflationary. But there is an important caveat here. The slow initial response of nominal compensation to higher productivity growth is the source of the temporary disinflationary effect of a productivity shock. Therefore, once the catch-up is under way, this disinflationary impetus gradually disappears.