Germany’s strong wage growth adds to ECB inflation struggle
ROBUST German wage growth is not abating and will likely keep inflation high, according to the Bundesbank – a worrying signal for the European Central Bank as it battles to return price gains to its 2 per cent target.
Collectively agreed earnings increased by 4.2 per cent in the spring, Germany’s central bank said on Tuesday (Aug 20) in its monthly report. It highlighted that unions’ demands remain high – between 7 per cent and 19 per cent for a period of 12 months.
“The high level of willingness to strike until recently and the still widespread labour shortage suggest that comparatively high wage increases will continue in the future,” it said. This will probably keep underlying inflation “at an elevated level.”
The report comes two days before crucial eurozone pay data that will help ECB officials decide whether further interest-rate cuts are justified after their first move in June.
While they see inflation reaching 2 per cent at the end of next year, the prediction rests on a combination of moderating salary growth, corporate profits absorbing part of the pay increases and higher productivity lowering the cost per unit of output.
New productivity data last week disappointed – adding to growing skepticism that the ECB’s view may be too rosy.
In Germany, negotiated wages including additional benefits rose 3.1 per cent in the second quarter – half the pace recorded in the preceding three-month period. The Bundesbank highlighted that this was mainly due to effects of high tax-free inflation compensation premiums, which pushed up first-quarter pay increases and dampened them thereafter.
“Without taking these special payments into account, collective wages increased significantly more in the spring, at 4.2 per cent compared to the previous year, than in the winter (3 per cent),” it said. “Permanent wage increases are becoming increasingly important.” BLOOMBERG
Share with us your feedback on BT's products and services
