MNI INTERVIEW:Core Eurozone Inflation To Rise, Wages Contained

Eurozone core inflation will rise in coming months as dearer energy feeds through into basic products but there are no signs of a wage price spiral despite labour shortages, leading European small business association SMEunited told MNI.

Negotiated wage increases have been around 7% to 9% across the eurozone, though Belgian firms may lose competitiveness as pay increases there reach 11%, SMEunited’s head of economic and fiscal policy Gerhard Huemer said in an interview, in which he noted that labour shortages can also have an impact, sometimes pushing wage costs higher than negotiated levels. Wages and core inflation will be crucial considerations for the European Central Bank as it weighs future interest rate increases. (See MNI SOURCES: ECB Doves Eye Smaller Hikes As Inflation Falls)

“We will see over the next months the start of an increase in core inflation, as a result of higher prices for energy-intensive basic products creeping through and wage increases creeping through, but no additional pressure from the wage side - because wage settlements have been reasonable,” he said.

LABOUR SHORTAGES

But the services sector, where labour can constitute 80% of total costs, is facing particular pressure to raise prices as it copes with a shortage of qualified staff as a result of demographic changes as well as the digital and green transitions.

“There are not enough qualified people on the market, while in the low wage sector a lot of workers post-Covid are not returning from Romania and Poland, for example, so there is less supply even at the low end of the labour market,” he said.

“We now have again more companies complaining about shortages of labour than energy prices.”

Generous government support to households in response to last year’s energy price spike may also continue to boost demand and feed through to inflation, he said.

“If you already have high prices because of shortage of supply and you give more money to the demand side then it will result in even higher prices.”

The EU has put pressure on national governments to keep such support schemes ‘temporary and targeted’ but this advice has yet to have any impact on their budgets.

Huemer noted ongoing public debates in Germany, France and Belgium over the generosity of social security systems creating disincentives for labour market participation.