The three scenarios for inflation, monetary policy and wages

In the United States and the euro zone, wages are now rising much less than prices. There are t h ree possible scenarios from here: Scenario 1: wage growth remains low, inflation high, and the loss of purchasing power is offset through public transfer payments (this is the current strategy of France, for example). This strategy’s limit is its cost to public finances; Scenario 2: wage growth remains low, but the central bank tackles inflation with a sufficiently restrictive monetary policy (this is probably the Federal Reserve’s strategy). This strategy’s limit is its cost to activity, the risk of a debt crisis and falling asset prices caused by the sharp rise in interest rates; Scenario 3: monetary policy remains not very restrictive, inflation remains high and wages are re-indexed to prices. This protects wage earners’ purchasing power, but the cost of this strategy is that it leads to markedly higher equilibrium inflation. There is evidently no risk-free solution to the purchasing power problem.