Americans are finally getting what they deserve

U.S. wages are clearly on the rise. This will lead to rising inflation and a stronger dollar. Although Dutch salaries may go up a bit, high unemployment in other parts of the EU stands in the way of European inflation growth.

It has taken a long time, but there are now more and more signs that US inflation is structurally picking up. Last Monday, June 19, that was the key message from William Dudley, the president of the New York Fed and a key adviser to Fed Chair Janet Yellen. The U.S. unemployment rate has fallen to 4,3 percent and, according to Dudley, the country is well on its way to full employment. If companies want to attract new employees, they will have to move them from other companies by offering a higher salary.

pull wallet
In recent years, companies have been increasingly willing to shell out to retain or attract employees. According to the Atlanta Fed's wage growth tracker, the average salary increase rose from about 2 percent in the period 2010 to 2014 to more than 3 percent last year. As unemployment continues to fall, the 4 to 5 percent of the period before 2008 will eventually come into view again.

A matter of time
American households increasingly notice that they have something left over every month. It is usual for consumption expenditure to increase. This leads to rising inflation and accelerating economic growth. Dudley expects it to be only a matter of time before inflation in the United States is back to the 2 percent level, which the FED is officially targeting.

The currency world keeps a close eye on these kinds of inflation movements. Higher inflation gives central banks room to gradually raise interest rates. The interest rate hike that the FED implemented last Wednesday is likely to be followed up later this year.

UK inflation has a different cause
On the contrary, a day after the Fed's decision, the Bank of England chose to leave interest rates unchanged at all-time lows. At first glance, this is a strange choice, as inflation in the country has risen from 0,5 percent to 2,9 percent within a year. This increase is caused by the fall in the British pound since the Brexit referendum last year. As a result, the prices of items and services that the country imports have risen.

In the same period, wage growth has actually fallen in recent months, from almost 3 percent to just over 2 percent. So the salaries of many Britons are not increasing fast enough to compensate for the loss of purchasing power due to higher inflation.

Dutch wages must rise
The rest of Europe is still far behind the United States in terms of inflation. Unemployment has already fallen considerably in Germany and the Netherlands. Last week, IMF director Christine Lagarde even said that salaries in the Netherlands should increase. This is in line with the conclusions of both the CPB and DNB earlier last week.

This is positive news for Dutch employees, but our country carries little weight from a European perspective. As long as more than 9 percent of Europeans in the labor market are out of a job, wage inflation on our continent is still a long way off. Without the tailwinds of rising inflation and a further decline in political risk, the euro will struggle against the dollar in the second half of the year.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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