Hi! Author here! - I think I agree with the general point you're making. To elaborate: I've actually written about the underlying inflation mechanism (May 10, 2

Hi! Author here! - I think I agree with the general point you're making. To elaborate: I've actually written about the underlying inflation mechanism (May 10, 2023 - (Un)intuitive Inflation). The main model used by central banks for modelling inflation is the New-Keynesian Model. This model explains that the rate of inflation is related to the level (sic) of real marginal costs, desired (Note: not realized) mark-up (profit margin) and inflation expectations. The main element through which wages feed through to inflation is the real marginal cost. However, if current wages are below pre-pandemic real wages (which for many still are), then real marginal cost is lower, thus pushing the inflation rate down below the 2% inflation target. During the 2021-23 inflation surge, the supply shock and bottlenecks created significantly pushed up the real marginal cost of production (things like over-time, things like it taking to produce longer than before due to supply delays etc). This has reverted bringing back down the level of real marginal cost. Which is why we are close to the 2% inflation target. The mechanism regarding price setting - between firms and workers - is actually really nicely put by a recent Werning and Lorenzoni paper - Inflation is Conflict. Interestingly, they are capable to generate a theoretical result where we have inflation with no money! Meaning there is no monetary policy.