Unions don't infate prices higher than the wages they gain.
A: people are not saving any money
B: consumption for necessary goods are unlimited (they arn't you can only eat so much food, a middle class household won't buy extra houses if they have some extra cash)
C: Your assuming That supply won't meet demand (of coarse it will move in that direction)
D: Your also leaving out tons of other factors, for example people with disposable income and more time can shop around more, thus putting a downward pressure, or the fact that they don't spend extra money on things like food or electricity, but rather more luxury goods, or say the fact that higher wages may mean you only need one person working rather than 2 and so on and so forth."
And when people have money to spend you have an incentive for investment to meet that demand, thus all teh excess capacity gets put to use ... thats where the production comes from ... We HAVE excess capacity, get that through your head, the capital is there, but without demand there is no incentive to put people to work.