The current under-indexation of wages to prices averts a strong central bank reaction to inflation

The degree of nominal wage indexation to prices remains low in the United States and the euro zone today. This means that: The inflation shock resulting from the prices of commodit ies , electronics and transport remains transitory, whereas it would be permanent if wages were closely indexed to prices; The fall in real wages will curb domestic demand and thus contribute to disinflation. Low wage-price indexation therefore allows central banks to react little to inflation, as the inflation shock is transitory and domestic demand is weakened by inflation. The situation would be completely different if wages were closely indexed to prices. It is important to note in particular that in the event of an inflation shock, a restrictive monetary policy slows demand in order to reduce inflation, but this reaction is pointless if the fall in real wages (when nominal wages are poorly indexed to prices) leads to this slowdown in demand.