{
  "title": "Europe’s Wage-Price Puzzle",
  "publication": "IMF Blog, November 11, 2019",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2019/11/11/europes-wage-price-puzzle",
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  "summary": "Author: Richard Varghese",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Author: Richard Varghese\n- November 11, 2019\n- Context: Chart of the Week exploring why robust wage growth in Europe has not translated into higher inflation; draws on Chapter 2 of the Regional Economic Outlook: Europe."
    },
    {
      "heading": "Key findings",
      "content": "- The link between wage growth and inflation in Europe has weakened considerably in the decade since the global financial crisis.\n- More precisely, the impact of wage growth on core inflation has been only two-thirds as strong as in the period before the crisis.\n- Despite wages rising at a robust pace, especially in the European Union’s newer member states, inflation has barely risen."
    },
    {
      "heading": "Mechanisms explaining the weaker wage-to-price passthrough",
      "content": "- Inflation expectations:\n  - Firms are more reluctant to raise prices in response to an increase in labor costs when inflation is low and inflation expectations are well anchored.\n  - Firms see higher wage costs as temporary, so they limit price increases expecting competitors to do the same.\n- Competitive pressures:\n  - Firms’ pricing strategies depend significantly on their exposure to competition, domestic or from abroad.\n  - Sectors with more overseas competition, such as manufacturing, are less likely to raise prices in response to higher wage growth than the services sector.\n- Corporate profitability:\n  - The passthrough of wage growth to inflation is significantly lower when corporate profits are healthy.\n  - Profitable firms can absorb a higher wage bill without raising prices, especially if they want to preserve market share."
    },
    {
      "heading": "Policy implications and outlook",
      "content": "- With inflation expectations near historic lows, rising competitive pressures, and comfortable profit margins, it is likely that robust wage growth will not meaningfully spur inflation in the near future.\n- Monetary policy:\n  - These findings suggest that monetary policy in many European countries should remain accommodative for longer to lift inflation durably to its target.\n- Financial stability risk:\n  - Policymakers must be on guard for financial instability that could arise when an extended period of low rates encourages greater risk taking.\n\nSource: IMF Blog post \"Europe’s Wage-Price Puzzle\" by Richard Varghese, November 11, 2019.\n\n---\n\n\n References\n\n- Regional Economic Outlook: Europe\n- https://www.imf.org/wp-content/uploads/2019/11/eng-nov-6-reoch2-1.png\n\nSource: https://www.imf.org/en/blogs/articles/2019/11/11/europes-wage-price-puzzle"
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    "Authors: Richard Varghese",
    "Published: November 11, 2019",
    "Author: Richard Varghese",
    "November 11, 2019",
    "Context: Chart of the Week exploring why robust wage growth in Europe has not translated into higher inflation; draws on Chapter 2 of the Regional Economic Outlook: Europe.",
    "The link between wage growth and inflation in Europe has weakened considerably in the decade since the global financial crisis.",
    "More precisely, the impact of wage growth on core inflation has been only two-thirds as strong as in the period before the crisis.",
    "Despite wages rising at a robust pace, especially in the European Union’s newer member states, inflation has barely risen.",
    "Inflation expectations:",
    "Competitive pressures:",
    "Corporate profitability:",
    "With inflation expectations near historic lows, rising competitive pressures, and comfortable profit margins, it is likely that robust wage growth will not meaningfully spur inflation in the near future.",
    "Monetary policy:",
    "Financial stability risk:",
    "[Regional Economic Outlook: Europe](https://www.imf.org/en/Publications/REO/EU/Issues/2019/10/24/REO-EUR-1119)",
    "[https://www.imf.org/wp-content/uploads/2019/11/eng-nov-6-reoch2-1.png](https://www.imf.org/wp-content/uploads/2019/11/eng-nov-6-reoch2-1.png)"
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