By Paul Hannon
Eurozone wages increased at a slightly faster pace in the final three months of last year, but growth remained short of the rate needed to ensure inflation remains at the European Central Bank's target over the medium term.
The annual rate of inflation exceeded the ECB's target of just below 2% for the first time in four years during February. But that was due to a rise in energy prices that is unlikely to be sustained, and policy makers have said a pickup in wages is essential if they are to be convinced they will meet their target over coming years.
Higher wages can boost inflation in two ways. With more money to spend, workers can bid up prices of goods and services, while businesses paying higher wages often raise their prices to cover their increased costs and maintain their profit margins.
Speaking at a news conference earlier this month, ECB President Mario Draghi said wage developments are "the key variable that we should look at" when judging whether an increase in inflation is "self-sustained."
Figures released Monday by the European Union's statistics agency offer very modest encouragement to policy makers seeking signs that a series of stimulus measures launched since mid-2104 are having the desired effect.
Eurostat said wages in the last quarter of 2016 were 1.6% higher than a year earlier, a slightly faster increase than the 1.5% recorded in the three months to September. But that rise was below the 1.8% registered in the final three months of 2015.
By comparison, U.S. wages rose 2.8% from a year earlier in February, the second-highest reading of the current expansion. Overall eurozone labor costs were also up 1.6%, a pickup from 1.4% in thethird quarter.
Policy makers are hopeful that a steady rise in employment will push wages higher. Figures released last week showed the number of people in work across the eurozone rose by 0.3% during the final three months of last year, to 153.9 million, the highest level since the financial crisis hit in the third quarter of 2008.
But there are hidden forms of unemployment, such as people working part time who would prefer to work full time, and economists at the ECB expect the fall in unemployment will slow this year as they work longer hours.
The recent rise in inflation may encourage workers to demand higher wage settlements. But in their March forecasts, the ECB's economists warned that may not be a widespread enough outcome to have a significant impact.
"In some countries higher inflation may, over time, also positively affect nominal wage developments, wherever wage bargaining processes include a notable backward looking element," they wrote. "However, for 2017 the potential for upward effects of higher inflation on negotiated wages is constrained by the fact that, in several countries, most of the negotiated wages for 2017 are already locked in for this year."
The ECB's economists expect wages to rise 1.8% this year and 2.1% in 2018.
Across the eurozone, there were some countries in which wages rose rapidly, but they were smaller economies in central Europe and the Baltic States. In Germany, wages rose by 2.9%, but wages were up just 0.1% on the year in Italy, and declined in Greece and Austria.
Write to Paul Hannon at firstname.lastname@example.org
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March 20, 2017 06:14 ET (10:14 GMT)
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