Inflation Loops

Edit 1: I bought some DLR preferred at discount last week. Preferred stocks are ultra long duration instruments sensitive to changes in yield. The immediate bet is on credit spreads normalizing, but longer term it's also a bet on inflation. So that's where the below analysis is coming from.

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Consensus is that we are going to a zero interest rate forever, Japan like deflationary scenario. But here's how inflation can happen.

The inflation that markets worry about is not an one-off event, but higher prices year after year. 

For that to persist you need some sort of positive feedback loops. Here's what I think the loops are:

1) the "price increase -> wages up -> price increase" loop. Some initial supply shock raise prices (e.g. coronavirus shuts down supply chains). Higher prices lead to labor demanding higher wages (and with government and politics shifting left, labor is more likely to get higher wages). Higher wages force firms to raise prices. 

The cycle repeats itself as long as labor can raise wages and firms can pass through price increases. That requires:

• a) labor having bargaining power over firms
• Technology and automation decrease labor's bargaining power and lowers wages. Stalling technological advances can help labor here. 
• Politics can also help labor over firms.
• b) firms can raise prices because demand is not the issue, but supply is.

2) The outer loop:  The "price->wages->prices" inflation vicious circle invites government action. Government not only goes to bat for labor, but also intervenes in some heavy handed way (price controls, industrial policies..etc).  This leads to resource misallocation and output shortfalls in the product and services that people actually want. Supply side issues lead to higher prices and the vicious circle reinforces itself.