chicken-and-egg question of inflation

This leads us to the key question of how the causality between wages and
inflation works. Under the Keynesian concept of “cost-push” inflation, which
serves as basis for the Phillips curve, wages influence inflation. The neo-
Keynesian approach, however, assumes that wage rises depend not only on
unemployment, but also on inflation expectations, which means that the
causality runs both ways. This concept is confirmed by most statistical
examinations of the relationship.

“Measuring” inflation expectations is quite
difficult, however. Survey-based approaches often simply extrapolate recent
developments (adaptive forming of expectations). Financial-markets based
approaches often result in extreme and less plausible results as the financial
markets are subject to herd behaviour.

Moreover, German trade unions used
the ECB inflation target of just below 2% for their wage demands, at least during
periods of low inflation, and not an inflation forecast, which might have been
lower.