Is the real inflation hit yet to come?

European inflation has reached its highest level in 10 years. This is mainly a result of rising energy prices. This allows the ECB to dismiss high inflation as a temporary effect. But when the tight labor market leads to higher wages, it becomes a completely different story.

Do you already notice it in your wallet? Europeans spent 3% more on groceries, housing costs and other everyday matters in August than 12 months ago, Eurostat has calculated. That increase is higher than the 2,2% in July. As in recent months, the increased oil price plays a major role in this. Although inflation has reached its highest level since 2011, central bankers have shown little sign of action. It seems that the impact of higher energy prices is a temporary effect.

The price of a barrel of Brent oil has risen more than $25 to over $70 since August last year. This means that the oil price is approximately back to the level it was before the corona outbreak. The chance is now quite small that oil will continue to rise very fast in the next twelve months. But there are also other things that can keep inflation high. In this respect, the tight labor market is attracting more and more attention.

Tension in the labor market

Yesterday it was announced that the unemployment rate in the eurozone fell to 7,6% in July. That is slightly less than the 7,8% of a month earlier – and a big difference with the 8,4% of July 2020. Behind those percentages, large differences hide. In Germany, for example, according to Eurostat, the seasonally adjusted unemployment rate has already fallen to 3,6 %. In the Netherlands this is only 3,1%.

In many countries, the tension on the labor market is already rising considerably. The big question is how the ECB looks at these figures. That will become clear during the policy meeting next week. For the time being, the chance is not very great that the bank will take an advance on a change in policy. The ECB would rather intervene a little too late so that inflation rises too far, than step on the brakes quickly now, at the risk that the economic recovery will be nipped in the bud.

unfortunate timing

Moreover, it is difficult for the ECB to predict to what extent the tight labor market will lead to rising wages; European wage figures will not be released until after the meeting. Rapid increases in salaries can lead to a wage-price spiral. Companies hereby raise their prices to absorb rising wage costs, after which employees demand more wages in view of higher consumer prices.

In the Netherlands, wages are already clearly rising in some sectors, such as the catering industry. But it is far from that at European level. However, the economic recovery and shrinking unemployment seem to mean that it is no longer a matter of course within the financial world that European interest rates will remain extremely low forever. In recent weeks, the euro has in any case already appreciated somewhat against other major currencies, such as the dollar and the pound.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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