Tue. Oct 19th, 2021

Eurozone inflation updates

Labor costs in the eurozone fell for the first time in a decade, by 0.1% in the three months to June of a year ago, despite rising consumer price inflation and falling unemployment.

The slight decline in wages and non-wage costs in the 19-nation bloc is at odds with fears that a recent acceleration in price growth and an improved labor market could contribute to higher salaries of workers.

Eurostat, the EU statistics group, said the latest data should be taken into account in the light of a sharp rise in labor costs shortly after the pandemic hit in the second quarter of 2020, when it rose by 4.3 percent of the previous year.

This means that labor costs have risen by an average of just over 2 per cent over the past two years, in line with typical levels over the past decade.

“These headlines are in line with the reopening of the economy in the second quarter and the regular media reports on labor shortages,” said Jessica Hinds, an economist at Capital Economics.

‘This can be mainly explained by base effects; the total hours worked decreased in the second quarter of 2020 due to collapses and schemes, which increased hourly wage growth, ”says Hinds. Although wage growth is unlikely to remain as weak as the data suggest, she predicted that it would remain ‘fairly subdued’ due to ‘free capacity’ in the labor market.

Consumer price inflation in the eurozone rose to a decade high of 3 per cent in August – above the European Central Bank’s target of 2 per cent, raising fears that rising energy prices and supply chain bottlenecks could raise prices.

But the ECB expects inflation to fall below its target next year and its president, Christine Lagarde, said last week that while it would be ‘very vigilant’ for the autumn wage negotiations, ‘we do not expect these wage increases and these wage negotiations to be very strong . ”

Line chart of the eurozone labor cost index (quarterly data -% annual change) showing that wage growth in Europe is tumbling

There was little sign that inflation was causing higher wages, although the Verdi trade union in Germany recently called for a 5 per cent wage increase for 1.1 million public sector workers. German train drivers prominently asked to claim higher salaries, and some pubs and restaurants in Paris and Berlin also increased the payment to fill vacancies.

Wages are index-linked for many workers in countries such as France, Spain and Belgium, which means they will rise automatically due to higher inflation. Carsten Brzeski, head of macro research at ING, said: “If you throw in supply chain problems, it all points to higher wages next year.”

Eurostat said that in the second quarter, hourly wages fell by 0.8% among businesses in the euro area from the previous year and rose by 1.7% in other areas of the economy, including the public sector.

The sectors with the largest declines were accommodation and food services, where wages fell by 4.5 per cent, and transport and storage, where they fell by 1.8 per cent. The largest increase was a 3.3 percent increase in the wages of human health and social workers.

Meanwhile, there was another sign that the eurozone economy made a strong start to the third quarter, after industrial production in the bloc exceeded economists’ expectations by rising 1.5 percent in July from the previous month, and taking it back above pre-pandemic levels.

Morgan Stanley economists said July’s strong data ‘suggests that the manufacturing sector in the eurozone may be adjusting to the persistent shortage of semiconductors and the wider bottlenecks in shipping’.

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