Wages and the ECB monetary policy

Discussions on wage dynamics in the Euro Area. The momentum is now higher (2%) but not sufficient to push core inflation on the upside. The enigma is not solved yet. That’s the analysis of this NY Times article.

Nevertheless, the example comparing France and Germany in the article is not totally convincing. There is still a lot to understand on the labor market.

Workers may finally be getting a bigger piece of the economic pie — at least in Europe. Just don’t ask why, or whether it will last.

In the decade since the financial crisis, much of the global economy has recovered and is back on stable footing. Companies are reporting record profits, unemployment levels are plummeting and overall global growth is back on track.

Wages in most developed countries, however, have barely budged.

Read the article here. nyti.ms/2mI1Hnv

Wage trends and employment – My Monday column

The minutes of the ECB’s March meeting reflect the central bank’s confidence in economic activity conditions in the euro area. The most noteworthy point reflecting this perception is the removal of APP easing bias i.e. the reference to increasing the asset purchase program if necessary. The bank no longer thinks that economic momentum will require emergency intervention. However, uncertainty remains on inflation trends and the ECB continues to insist that the ongoing reduction of economic slack would allow inflation to converge towards the central bank’s aim. March 2018 projections are still far from the 2% target even in 2020, when headline inflation is only expected to come to 1.7%.
bce-prev-inflation-en.png
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United Kingdom – Slowdown for the wage purchasing power

For the English salaryman, the situation is becoming more complex. The higher inflation rate is currently reducing the gap with the nominal wage growth (graph 1). The figure for wages in January shows an increase above 2% while the inflation rate is just a little below 2%.
From the end of 2009 to the end of 2014, the purchasing power of wages has dramatically decreased. Real wage is not back to its pre-crisis level. (graph 2)
The Brexit is currently starting will be a persistent negative shock on the economy. The changes in rules for the economic relationship between UK and the European Union will have a persistent negative effect on the economic activity and therefore on the labor market. Nominal wage growth will be limited while the inflation rate will remain high. As a consequence the external negative shock will not be compensated by a strong internal demand.
The situation will be hard to manage in the UK.

Graph 1
uk-2017-january-wage-inflation

Graph 2
uk-2017-january-realwage