ECB: Faster euro-area wages signal inflation will return

ECB: Faster euro-area wages signal inflation will return

By BLOOMBERG

FRANKFURT • The recent acceleration in wage growth in the eurozone is a harbinger of higher future inflation, the European Central Bank (ECB) said yesterday.

The article in the ECB’s Economic Bulletin seeks to dispel concern that pay rises have lost their signalling function for future price gains. While wage increases in the 19-nation currency area have picked up in the last two years, they have largely been offset by productivity gains, keeping unit labour costs flat.

The ECB is on the look out for signs that inflation pressures are building as it prepares to end its bond buying plan later this year. While a pick up in energy prices has pushed price gains above policy makers’ goal for now, officials expect an “ongoing solid and broad-based economic growth” that will bolster wages and produce the right kind of inflation down the line.

To assess the pass through from pay growth to inflation, ECB researchers ran a model to see how wages and unit labour costs respond to a demand shock and how this shock impacts the gross domestic product deflator — a measure of inflation within the economy.

According to their findings, in a demand-driven shock, “the upward price pressures are initially only correctly signalled by compensation per employee, while unit labour cost developments in the first few quarters even provide contradictory signals”. That differs from a supply shock, where the increase in unit labour costs is immediate.

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