Euro area wage rises boost prospects of a rate in­crease

Irish Independent - Business Week - - Front Page - Fer­gal O’Brien

EURO-AREA wages are on the rise, giv­ing an­other boost to the Euro­pean Cen­tral Bank’s view that it’s the right time to change pol­icy tack.

Col­lec­tive wages rose 2.2pc in the sec­ond quar­ter, the most since 2012, ac­cord­ing to up­dated Euro­pean Cen­tral Bank data. That’s up from 1.7pc in the pre­vi­ous three months.

For econ­o­mists, that’s ev­i­dence that the bet­ter labour mar­ket – un­em­ploy­ment is at the low­est in al­most a decade – is start­ing to feed through more to pay, which should in turn lift in­fla­tion.

That’s good news for ECB pol­icy mak­ers in a sum­mer that’s seen Ital­ian bond yields pushed higher by in­vestors’ bud­get con­cerns and Turkey de­scend into a cur­rency cri­sis that could, if it spreads, un­der­mine sen­ti­ment.

The ECB an­nounced in June it was wind­ing down its bond-pur­chase stim­u­lus pro­gramme, in part be­cause it an­tic­i­pates an im­prove­ment in in­fla­tion later this year.

President Mario Draghi has cited wage growth for this view, not­ing in par­tic­u­lar bet­ter ne­go­ti­ated set­tle­ments.

“The pe­riod of a core in­fla­tion rate fluc­tu­at­ing around 1pc is prob­a­bly com­ing to an end,” said Ralph Solveen, an economist at Com­merzbank in Frank­furt.

“The only ques­tion is how fast it will rise.”

Bloomberg Eco­nom­ics also sees a grad­ual pickup in core in­fla­tion, “but­tressed by ac­cel­er­at­ing wage growth”.

Ac­cord­ing to Com­merzbank, the bet­ter sec­ond-quar­ter wage growth was driven by Ger­many, where deals in the metal and con­struc­tion in­dus­tries lifted col­lec­tive wages more than 3pc.

There may be more com­fort for pol­icy mak­ers on Thurs­day, when flash PMI numbers for Au­gust are due to be re­leased.

The com­pos­ite read­ing is fore­cast to have risen slightly, ex­tend­ing the re­cent sta­bil­i­sa­tion after a tor­rid start to the year. The ECB will pub­lish the ac­counts of its July pol­icy meet­ing on the same day.

(Bloomberg)

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