Weak German Wage Gains Leave ECB Waiting for Inflation Spark

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Nolting Says Strong Euro Not in Draghi's Interest

Wages in Germany are picking up -- but only just.

An index of negotiated wages rose 2.3 percent in 2017 from the previous year, according to a preliminary estimate of the Federal Statistics Office in Wiesbaden. The gain is the highest of the past three years but still lags behind the salary increases recorded in 2012-2014.

Pay raises in Europe’s largest economy are being closely watched as a key element to spur the sustainable pick-up in inflation that ECB President Mario Draghi wants to see before withdrawing monetary stimulus. The Governing Council meets Thursday in Frankfurt for its last policy-setting meeting of the year.

Theoretically, the country’s buoyant economy and record-low unemployment should push salaries up, but a tradition of restraint in pay demands and weak inflation in recent years have reduced the pressure. In fact, real wages -- which take inflation into account -- rose at the slowest pace since 2014 this year.

The moderate increase in pay, coupled with a stronger euro, may spell some trouble ahead for German consumers, who have been one of the drivers of the recovery in past years thanks to a mix of almost-stagnant prices, cheap oil and low ECB interest rates.

Yet, a turning point could be approaching.

“Wage inflation is rising in several member states,” said Mark Wall, Deutsche Bank’s chief European economist. “A pick-up in inflation in the important German wage settlements in the first quarter could change perceptions. We expect wage growth to exceed its five-year trailing average.”

The index published Tuesday includes one-off payouts such as holiday and Christmas bonuses, incentives and severance payments. Excluding those elements, the index rose 2.8 percent.

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