Eurozone Wage Growth Hits Two-Year High -- Update

By Paul Hannon Features Dow Jones Newswires

Eurozone wages rose at the fastest pace in more than two years during the three months to June, a sign inflation may be set to rise to the European Central Bank's target.

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The 19-nation eurozone economy has grown more strongly than expected this year, shrugging off the uncertainty created by a series of elections in the Netherl ands, France and Germany that threatened but failed to yield gains for anti-euro nationalists. The ECB's economists now forecast the eurozone economy is on course for its best year since 2007, reducing the need for support from policy makers. Much as in the U.S., though, inflation has yet to show signs of a sustained rise toward the central bank's target, which is just under 2%.

The missing element in the link between growth and inflation has been wages, which have grown more slowly that the ECB had expected. Higher wages can boost inflation by increasing costs for businesses, which are then passed on to consumers. They also raise spending power, another upward pressure on prices.

"Nominal wages, which are a primary driver of inflation, are...lagging behind what one would've expected from such strong recovery across the board," said ECB President Mario Draghi in a news conference last week.

However, figures released Friday by the European Union's statistics agency suggest that may have changed. Eurostat said wages were 2.0% higher in the three months through June than a year earlier, the fastest rise since the first quarter of 2015 and up from 1.3% in the previous three-month period.

The ECB's economists had expected wages to pick up more slowly. They forecast last week that wage growth would rise to 2.0% next year and to 2.3% in 2019 from 1.5% in 2017, although they still saw inflation running below target in the final year of that projection.

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The pickup in wages, if it appears to be sustainable, makes it more likely that the ECB will wind down its purchases of government and other bonds next year. Mr. Draghi last week said policy makers had discussed options for reducing stimulus and would likely decide at their next meeting on Oct. 26 how to "calibrate" bond purchases.

Economists at Credit Suisse wrote in a note to clients that eurozone wages data tends to get less attention from traders and investors than similar figures from the U.S. and the U.K.

"That is mainly due to the fact that ECB tightening has been off the table for so long," they wrote. "Clearly that is not the case anymore, and we believe markets should be paying more attention."

Friday's figures follow data released earlier this week that showed the number of people in work across the eurozone rose 0.4% during the second quarter, and at 155.6 million was the highest number ever recorded. With more people in work, and earning more, spending power is on the rise, a boost for the eurozone's growth prospects.

The improvement in the jobs market is one development that has made consumers more upbeat about their prospects than at any time since the global financial crisis. Some analysts believe it has also been behind the surprisingly weak performance of politicians offering novel economic policy proposals in this year's elections.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

September 15, 2017 09:07 ET (13:07 GMT)