Euro area labor cost growth picks up in Q2, labor market might generate additional inflationary pressures

With the European Central Bank on track to lower the rate of its asset purchase program from the beginning of next year, most of its confidence that a reduction in monetary accommodation would be appropriate is based on the improved outlook of the euro area economic growth. On the contrary, the subdued near-term inflation outlook continues to be a concern for policy-makers, with the ECB’s projections published last week indicating a likely dip next year in headline inflation to 1.2 percent year-on-year and just a small rise in the core rate to 1.3 percent year-on-year.

However, the ECB is expected to take some comfort from the labor cost figures released today that implied that labor market might be generating some additional inflationary pressures. The total euro area labor costs per hour was up 1.8 percent year-on-year, the highest rate since early 2015.

Excluding agriculture and the public sector, labor cost growth was firmer still at 1.9 percent year-on-year. Amongst the major member states, Germany led the way, with labor costs rising 2.3 percent year-on-year, up from the 2 percent year-on-year pace in the first quarter. However, it was slightly slower than seen in the past two years.

But the rebound was broad-based with labor costs rising by 1.5 percent year-on-year in France, Italy and Spain, representing the strongest readings since the first quarter of 2016, fourth quarter of 2013 and the second quarter of 2012 respectively. Indeed, this is just one quarter of data, which might in retrospective eventually prove to be an anomaly, noted Daiwa Capital Markets Research.

“Moreover, even if it does not, labour cost growth still needs to rise about 1ppt to match the pre-financial crisis average, suggesting that today's figures might merely represent only a modest step in the right direction”, added Daiwa Capital Markets Research.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at -17.5827, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 6.00351. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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