Eurozone: wages growth and inflation
Wages growth in the eurozone accelerated sharply in the first quarter of 2023:
Average base salaries, negotiated under collective bargaining agreements, rose by 4.3% year-on-year, the sharpest annual increase since the monetary union was created. This rate of growth – while below inflation – is significant. Wages across the euro-area are likely to continue to grow strongly over the coming months, supported by persistently-high inflation and the record low unemployment rate (6.5% in April).
Other key points:
The pace of inflation in the United Kingdom remains a cause for concern and is likely to force the Bank of England to raise its policy rate during the summer. While headline inflation fell, from 10.1% y/y in March to 8.7% y/y in April, core inflation continued to accelerate, up from 6.2% to 6.8%. In addition to the very sharp rise in food prices (19.3% y/y), services prices also climbed, reaching the highest level in 31 years at 6.9% y/y in April, driven in particular by rent hikes not seen since the mid-1990s (up 5.5% y/y, the steepest increase since March 1996). The increase in services prices has affected all segments, including communications (up 7.9% y/y, reflecting the jump in telephone subscriptions in April), motor insurance (up 38.5%) and organised travel (up 12.7%). More than 85% of components of the CPI are now rising by more than 4% y/y, the highest ever.
Core inflation in the United States remained high in April (CPI and PCE deflator), but some alternative indicators improved somewhat. Indices dedicated to the generalisation of inflation have started to decline, while PMI survey data once again indicate that fewer companies increased their selling prices in May (although these are still in the minority in the survey). Long-term inflation expectations remain contained and the inflation breakeven rate has continued to fall. The rise in wages has slowed down since the start of the year but the gap with inflation is still narrower than in Europe and Japan, indicating a less significant reduction in real wages in the United States.
In the eurozone, the annual increase in producer prices slowed to 1% in April. The energy price component of the CPI has fallen in more than a third of Eurozone countries, with the most significant negative contributions coming from Belgium and the Netherlands. The Baltic states and Slovakia have seen a modest decline in headline inflation, which remains above 10% y/y in May.
Food inflation in the eurozone has stabilised at a very high level. However, several services sectors have seen a more and more marked rise in inflation, in some cases due to wage increases, for example in accommodation and food services, education, recreation and culture. Some alternative measures of inflation, closely monitored by the ECB, have nevertheless slowed, such as the PCCI and the weighted median inflation rate.
Consumers’ long-term inflation expectations increased in May in the United States (University of Michigan survey) and fell in the eurozone in April (ECB’s Consumer expectations survey). The central banks will continue to monitor closely expectations developments in the future, even though there has not been any real deterioration up to now.
In Japan, market expectations are being cautiously adjusted to the new inflationary environment. The inflation breakeven rate reached just over 1.2% at the end of May. However, core inflation (excluding energy and fresh foods) broke through the 4% y/y mark in April for the first time since 1986, when current statistics began. More than half of CPI categories have recorded an increase of over 2% over the last 12 months. Two of the three alternative measures of inflation scrutinised by the Bank of Japan have exceeded 3% ( trimmed mean) or are close to this level (mode).
