28 April 2008

EZA 840 Report: Germany Inflation Outlook

German service sector wages – upshift in German inflation


The favourable April inflation figure (2.4% y/y on a national measure) clouds the fact that structural inflation pressure has built up over recent quarters.
Recent wage increases – 5.1% pay rise in the public service sector (30 Mar) and 4.4% pay rise in the Chemical sector (17 Apr) – seem to be the last piece of information of inflationary pressure in Germany.
While politicians still present the deals as a catching up of employees with past growth and productivity gains, trade unions see them as the “end of wage moderation.”
Per capita wage growth is forecast to rise from 1.2% to 2.2% this year and 2.6% next. While still modest by international standards, it signals the end of wage-related inflation relief going forward.
This assessment is corroborated by the change for the worst in the structural environment for inflation, seen in the rise of administered prices and a failure of the NAIRU to retreat further.
In this respect the economic institutes’ forecast of CPI inflation to decline to 2% by the end of this year and 1.5% in 2009 on domestic grounds seems overly optimistic.


Asset conclusions: German bonds still do not seem good value, given the sustained deterioration of the inflation environment in Germany and its knock-on effect on euro area economies.

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