Inflation Optimism
February 27, 2007
Although a recent increase in value added tax in Germany from 16 percent to 19 percent has had less of an impact on inflation than originally feared, wage discussions between unions and employers are stirring fresh concerns about price pressures, and especially at the European Central Bank.
"I think that inflation is developing quite well," said Luxembourg Prime Minister Jean-Claude Juncker, who chairs regular meetings of Euro zone finance ministers.
"Inflation, as far as the short-term is concerned, does seem under control," he added.
VAT hike fears unproven
Many economists' concerns the increase in German value added tax in January from 16 percent to 19 percent would nudge inflation higher in the Euro zone have so far proven to be unfounded.
The European Union's Eurostat data agency estimated inflation held steady in January at 1.9 percent and is due to provide a clearer picture on Wednesday with final figures, and an estimate for February on Thursday.
Meanwhile, private economists are forecasting that inflation was stable in February at 1.9 percent, which would mark the fourth month in a row that price growth has been right in line with the European Central Bank's preferred level of less than, but close to, two percent.
The Frankfurt-based central bank is widely expected to lift its benchmark interest rate to 3.75 percent at its next monetary-policy meeting on March 8 in order to keep a lid on inflation.
Productivity must support wage pressure
German Finance Minister Peer Steinbrueck, whose country currently holds the rotating EU presidency, took a optimistic view of inflation prospects as long as productivity kept up with wage growth.
"I don't see any inflation risks as long as wage policy in Europe is based on productivity," he told reporters.
Germany's powerful IG Metall labour union said Monday it would call for wage increases of 6.5 percent for the 3.4 million workers in the German engineering and metal-working industry in upcoming wage talks next month.
Earlier Monday, European Central Bank President Jean-Claude Trichet had sounded the alarm about big wage increases, calling for constraint in an interview with German magazine Focus.
Wage restraint crucial to competitive growth
"Wage moderation is and will remain important not just in Germany, but all over Europe," he said.
Juncker said that the Germany was bouncing back in part because constraint on wage increases had made German industry competitive again on the global stage.
He said that to remain competitive wage increases would have to remain in line with productivity growth, which would cancel out the impact of higher salaries on inflation.
"If wages continue to develop in line with productivity, wage increases will not give rise to any inflationary problems, nor will there be any loss in productivity," he said.