European Central Bank (ECB) Vice President Lucas Papademos said accelerating wage growth was another sign that faster inflation may be gaining a foothold in the euro region.
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 EU’s statistics agency reported on Friday. Economists had predicted that wages would 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 said on June 5 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 policymakers 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 last Wednesday.
Still, the ECB “will do everything that is necessary to anchor inflation expectations and to deliver price stability in the medium term,” Stark said.
In a presentation at the conference, Papademos said that inflation, which accelerated to 3.6 percent last month, was likely to “remain above 3 percent for a protracted period of time” before moderating.
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 agreed in April to a 4 percent pay increase effective Nov. 1 for 130,000 employees and another 3 percent raise starting in December next year.
Dutch wages increased more in the first quarter than in the whole of last year, the national statistics bureau said on 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.
The ECB, which aims to keep average annual price gains just below 2 percent, raised its inflation forecasts on June 5 to about 3.4 percent for this year and 2.4 percent for next year.
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