European Central Bank head Mario Draghi says he expects underlying inflation to rise in the 19 countries that use the euro as a stronger job market pushes up wages.
Draghi's comments Monday before the economic and monetary committee of the European Parliament in Brussels indicated the bank continues to think the recovery is strong enough for it to phase out its bond-purchase stimulus at year end.
Draghi told the committee members that "underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth."
He cited annual growth in negotiated wages of 2.2 percent in the second quarter, up from 1.7 percent in the first quarter. He added that the bank was increasingly confident that the pick-up in wages would continue because wage agreements often last two years or more.
The bank has pumped 2.5 trillion euros ($2.95 trillion) in newly printed money into the economy through the monthly bond purchases, trying to raise inflation from dangerously weak levels toward its goal of just under 2 percent annually. Annual headline inflation was 2.0 percent in August, on paper meeting the bank's goal; however the bank needs to be confident that the inflation rate will stay near its target even as it withdraws the stimulus. Core inflation, excluding volatile fuel and energy, has been persistently weaker.
It announced at its June meeting in Riga, Latvia that the purchases would be cut to 15 billion euros a month from October and brought to a halt at the end of the year. But bank officials have stressed that their interest rate benchmarks will remain at their current record lows well into next year. Those rates are zero for lending from the ECB to commercial banks, and minus 0.4 percent for deposits left at the ECB overnight by the banks. The negative rate is a penalty aimed at pushing them to lend the money to businesses.