ECB’s Gloomy Inflation View Highlighted by Weak German Pay Deal


The European Central Bank won’t find much sign of inflation in the pay deal struck by 3.8 million metals and engineering workers in Germany this week.

The IG Metall union settled with employers for a one-off Covid-19 bonus of 500 euros ($586) in June and a 2.3% wage hike starting in July. The deal is neither straightforward nor immediate -- the pay increase is effectively saved to be handed out as lump sums, and the package is stretched over 21 months.

Citigroup Inc. economist Christian Schulz and JPMorgan Chase & Co. economist Greg Fuzesi reckon the agreement equates to an increase of 1.5% this year.

ECB’s Gloomy Inflation View Highlighted by Weak German Pay Deal

“The deal is weaker than we had suspected and also weaker than seemed possible” after the same union’s iron and steel workers struck a higher bargain at the weekend, Fuzesi said in a report. “For the ECB, the deal will reinforce the sense that the inflation outlook is modest, and could even raise some concern on the downside, at least in the near term.”

The outcomes back the message from ECB officials that they will remain well short of hitting their inflation goal of just-under 2% over the medium term. Figures due Wednesday are predicted to show a rate of 1.4% for March.

While some economists have warned that pent-up demand and hoarded savings, combined with supply constraints on goods and services, could lead to entrenched price gains after the pandemic, ECB policy makers say employment concerns will ultimately dominate. They recently accelerated their monetary stimulus as the euro zone grapples with extended lockdowns because of slow vaccinations.

“The IG Metall deal confirms German unions’ focus on protecting jobs at the expense of wage restraint,” Schulz said in a report. “Low wage growth will be a significant drag on inflation, post-pandemic.”

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