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Are rapid wage increases also problematic? The German central bank warns of inflation risks.

TraderKnows
TraderKnows
05-22

Previously, the European Central Bank committed to starting interest rate cuts next month, but the situation in Germany is not looking optimistic.

The German central bank said on Wednesday that the pace of wage growth in Germany has exceeded expectations, raising some doubts about the continued decline in inflation.

Although the European Central Bank is almost certain to start cutting interest rates next month, and President Christine Lagarde said on Tuesday she is "very confident" that inflation is "under control," the German central bank, which is the largest shareholder of the ECB, took a more cautious stance on Wednesday. It warned that wage increases with the recovery of Europe's largest economy could pose inflation risks.

In its monthly report, the German central bank noted: "Fundamental deflationary processes remain at risk. Recent wage growth has exceeded expectations, which could mean that price pressures, especially in the service sector, may persist for a longer period."

The report shows that collective agreement earnings, including additional benefits, grew by 6.2% year-on-year in the first quarter of this year, compared to 3.6% year-on-year in the last quarter of 2023.

Excluding one-time payments, the annual growth rate of collective agreement wages in the last quarter was 3.0%, also higher than the growth rate in the previous three months.

The German central bank added: "This continues the upward trend in real earnings since the spring of 2021, which have been quite high in the long term."

The German central bank expects the inflation rate in Germany to rise from 2.4% in April to a slightly higher level in May and remain elevated in the coming months, mainly due to base effects compared to last year when train ticket prices significantly decreased and fuel costs dropped.

Due to the rebound in the service sector, Europe's largest economy is expected to continue recovering in the second quarter of this year.

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Inflation

Inflation refers to the phenomenon where the purchasing power of a country's (or region's) currency decreases, leading to a general rise in the prices of goods and services. It is reflected in the fact that, over a certain period, the same amount of money can only buy fewer goods and services.

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