Inflation and minimum wage: Bundesbank expects greater wage pressure

In times of increased inflation, the Bundesbank expects employees to take a bigger sip from the wage bottle.

"In this year's small collective bargaining round for around eight million employees, the favorable macroeconomic prospects, increasing labor market shortages and high inflation rates could contribute to noticeably stronger wage agreements," says the monthly report of the German central bank published on Monday.

According to the Bundesbank's economists, the planned increase in the statutory minimum wage to twelve euros from October is also likely to increase overall wage pressure.

This political intervention in wage setting would noticeably increase earnings in the lower pay groups and also have a noticeable impact on the segments above.

This should increase the upward pressure.

If one takes the historical relationships as a basis, the macroeconomic effects are "probably manageable".

However, in the current environment of very high inflation rates, it cannot be ruled out that wages will be passed on to prices to a greater extent.

According to the Bundesbank, the Omikron wave slowed down the German economy at the beginning of the year.

"In the winter quarter of 2022, German economic output is likely to decline noticeably again," it said in the monthly report published on Monday.

In addition to the restrictions to combat the corona pandemic, lost work due to the Omikron variant may also have contributed to this.

However, in view of the full order books of many companies, the Bundesbank expects the economy to pick up speed again in the spring, "if the pandemic subsides and the supply bottlenecks continue to ease".

In the final quarter of 2021, economic output in Europe's largest economy fell by 0.7 percent compared to the previous quarter, according to preliminary data.

If the gross domestic product shrinks for two quarters in a row, economists speak of a so-called technical recession.

However, this does not mean an economic slump for the year as a whole.

Moreover, the Bundesbank economists do not expect any rapid easing on the price front.

Fueled above all by high energy prices, the harmonized index of consumer prices (HICP) in Germany, which is decisive for the monetary policy of the European Central Bank (ECB), was 5.1 percent above the level of the same month last year after 5.7 percent in December 2021. “In the coming months, inflation is likely to remain high against the background of significant inflation at the wholesale levels and sustained demand," wrote the central bank.