Inflation and labour shortages will feed into wages

Significance

Reflecting this, US pay rises were the highest in more than 20 years, and euro-area pay rises the highest in more than 25 years. Broader measures of compensation were more modest, however. Inflation is rising sharply and in combination with labour market tightness is raising the risk of a wage-price spiral.

Impacts

• If wages outgrow labour productivity for a sustained period, higher inflation expectations could become entrenched.
• If labour costs accelerate ahead of expectations, this could prompt the Fed and ECB to raise interest rates quicker than planned.
• Europe could see more of the ‘Great resignation’ phenomenon this year, which would put further upward pressure on wages.