ECB: Need Stronger Wage Developments for Durably Higher Inflation, But Don’t See These

21 September 2021

By David Barwick – FRANKFURT (Econostream) – Durably higher inflation would require price pressures on a broad base and in particular stronger wage developments that to date are not clearly visible, the European Central Bank said on Tuesday.

In a pre-release from the sixth economic bulletin of the year, due out Thursday, the ECB said, ‘Overall, a substantial part of the strong increases in inflation and the upside inflation surprises over recent months in the United States and the euro area can be attributed to special factors that are likely to be of a temporary nature.’

‘For a more permanent increase in inflation, price pressures would usually need to become more broad-based (especially in the euro area) and also reflect increasing labour cost pressures’, it continued. ‘However, there is so far no firm indication of the latter once the effects of changes in the composition of employment and of job retention schemes are taken into account.’

The emergence from the pandemic of economies ‘represents a unique situation with considerable irregularities for inflation developments, which require close monitoring and add to the uncertainty surrounding the inflation outlook’, the ECB said.

The ECB noted expectations calling for US headline inflation to be well above pre-pandemic levels next year but for euro area inflation to top 2019 readings only a bit.

Still, ‘uncertainty about inflation developments in 2022 seems to remain substantially higher in the United States than in the euro area’, the ECB said.

Price pressures were more broad-based in the US than in the euro area, according to the ECB.

‘While a few items with especially high inflation rates (including energy inflation) played a crucial role in the strong increase in headline inflation over recent months, price pressures in the United States have increased more broadly across the distribution of items included in CPI less food and energy’, it said.

About one third of all items measured in CPI ex-food and energy registered annual inflation of above 4% as of July, with only 14% of them experiencing deflation, the ECB said, down from around a third in January.

‘In the euro area, by contrast, the shares of items with very low inflation (below zero) and high inflation (above 4%) have remained relatively stable’, the ECB said.

The relatively subdued development of inflation ex-food and energy in the euro area versus the US reflects the greater economic slack in the former along with several other causes, the ECB said. Among these were high price increases for used vehicles in the US in 2Q of the current year, which the ECB said accounted for approximately half of the rise in the US core inflation measure from 1.4% in January to 4.3% in July.

Used car prices have not risen much in the euro area and only have a weight in headline inflation of about one third of their weight in US headline inflation, according to the ECB.

In addition, the cost of services related to travel and transportation increased with the lifting of pandemic containment measures, which occurred earlier in the US, the ECB noted.

Rents mitigated somewhat the spread between US and euro area inflation trends, limiting core inflation in the US, but not in Europe, the ECB said.

US and euro area core inflation developments have in common an increasing contribution from consumer goods, not including clothing, footwear and used cars, the ECB observed.