Are German Wage Increases Beginning to Have an Effect on Inflation?

Inflation in Germany has largely been the result of rising energy costs as can be seen in the first chart which shows the total index of inflation and the core index excluding energy. The widening difference between the two series is due to the rising price of oil. So far there has been little evidence that the rise in energy prices has had secondary effects on the economy. In this connection, one series to watch is that of the monthly data on German hourly wages for the whole economy that was announced today.

Although the index declined 0.29% in June to 102.1 from 102.4 in May, it was 0.99% above June of 2005. Since the data are not seasonally adjusted, the year to year comparison is the more meaningful.While it is volatile, the second chart shows that wage growth is beginning to accelerate reversing the downward trend started in 2003. The annual increase in hourly wages was 2.68% in 2002, 2.03% in 2003, 1.17% in 2004 and 0.97% in 2005. For the first six months of this year, hourly wages have averaged an increase of 1.2% over the first six months of last year. With declines in the unemployment rate, union demands are likely to rise. Last week, IG Metall, the German steel and metalworkers' union demanded a 7% pay rise for the steel industry. While such demands are likely to be moderated, it appears that the secondary effects of the rise in oil prices are beginning to be felt.