Graphic content – June; the ECB continues to be too optimistic

Jack Norris
Written by

14th June 2017

The European Central Bank (ECB) recently lowered its headline inflation forecasts, with the latest figures now at 1.5% for 2017, and 1.3% for 2018. While the revision was based predominantly on weaker expected growth in energy prices, this forecast still remains below the ECB’s target of close to 2%.

The Eurozone’s core inflation rate has been hovering around a mere 0.9% for the last two years. Behind this is the fact that wage growth in the Eurozone has been persistently weak. As the chart below demonstrates, the ECB has consistently overestimated the future path of wage growth in Europe over the last four years.

Weak wage growth is not just a European phenomenon, however. The US and UK are also experiencing sluggish earnings growth. Indeed, wage growth is constrained there despite tighter labour markets. Europe has more spare capacity, and hence we should expect lower relative wage growth in the region. Nevertheless it appears that, globally, policymakers have failed to recognise a structural development in labour markets that has taken place over the last decade.

 

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