(Bloomberg) -- Robust German wage growth isn’t 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% target.
Collectively agreed earnings increased by 4.2% in the spring, Germany’s central bank said Tuesday in its monthly report. It highlighted that unions’ demands remain high — between 7% and 19% for a period of 12 months.
“The high level of willingness to strike until recently and the still widespread labor 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 euro-area 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% 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% 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% compared to the previous year, than in the winter (3.0%),” it said. “Permanent wage increases are becoming increasingly important.”
(Updates with additional data in last two paragraphs.)
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