ECB
European Central Bank Vice President Lucas Papademos said accelerating wage growth is another sign that faster inflation may be feeding into the euro-area economy.
Labor costs rose 3.3 percent in the 15 countries that share the euro in the first three months of the year, the most since 2003, the European Union's statistics agency reported June 13. Economists had predicted wages to repeat the previous quarter's 2.9 percent increase.
“It doesn't necessarily imply second-round effects are materializing, but is indicative of intensifying domestic inflation pressures,'' Papademos said in an interview at a conference of European and Asian finance officials in Jeju, South Korea.
ECB President Jean-Claude Trichet on June 5 said the bank may raise its benchmark interest rate by a quarter-point to 4.25 percent in July to curb inflation, which is running at the fastest pace in 16 years. ECB policy makers last week moved to damp market speculation that the bank would embark on a flurry of hikes.
“We are not talking about a series of rate increases,'' ECB Executive Board member Juergen Stark said in an interview published June 11. Still, the ECB “will do everything that is necessary to anchor inflation expectations and to deliver price stability in the medium term,'' Stark said.
Protracted Inflation
In a presentation to the conference, Papademos said that with inflation rising 3.6 percent in May it is likely to “remain above 3 percent for a protracted period of time'' before moderating payday loans online. The medium-term outlook for prices is subject to “upside risks,'' he said.
Second-round inflation occurs when consumers and companies seek compensation for higher food and fuel costs by pushing up salaries and their own prices, leading domestic inflation to spiral higher and risk becoming embedded in the economy.
Deutsche Post AG, Europe's biggest postal service, and Germany's Ver.di labor union in April agreed to a 4 percent pay increase effective Nov. 1 for 130,000 employees and another 3 percent raise starting in December 2009. Dutch wages increased more in the first quarter than in the whole of last year, the national statistics bureau said April 7.
Inflation expectations in the 15-nation euro region have started to rise. The so-called breakeven on five-year French inflation-indexed bonds was at 2.45 percent on July 13, up from 2.12 percent in March.
ECB Forecasts
The ECB, which aims to keep average annual price gains just below 2 percent, on June 5 raised its inflation forecasts to about 3.4 percent for this year and 2.4 percent for 2009.
At the same time, the ECB forecast economic growth will slow to 1.8 percent this year and 1.5 percent next year from 2.6 percent in 2007.
Investors expect the ECB to raise its key rate twice to 4.5 percent this year, according to Eonia forward contracts.