Inflationary inertia in a wage-price spiral model

This paper examines theoretical issues of inflationary inertia by use of a wage-price spiral model, in which wage and price decisions are staggered. It is shown that within such a framework inflation is inertial in the following sense: a monetary disinflation cannot immediately succeed and the rate of inflation declines gradually. It is also shown that from another aspect of inflationary inertia, which is the effect of cost shocks, inflation is less inertia! even in a wage-price spiral model: a temporary cost shock has no continuing effect on the rate of inflation. Only permanent changes in costs have an inertial effect and they raise the rate of inflation in consecutive periods as well.