ESRI: Avoiding 'wage-price spiral' may help keep ECB away from aggressive rate hikes

Potential 'silver lining' that may persuade the ECB to increase rates less aggressively than the US and UK is that wages are growing more slowly than inflation in the eurozone
ESRI: Avoiding 'wage-price spiral' may help keep ECB away from aggressive rate hikes

The ESRI is sticking to an earlier forecast that Irish consumer price inflation — which is running at 7% — will peak at just over 8% in the summer, before easing to 6.7% for the year as a whole. File picture: Larry Cummins

Moderate levels of wage increases in the eurozone may yet help keep the lid on the ECB moving aggressively to hike interest rates to control inflation this year, a leading Irish economist has said.                     

Financial markets are betting the ECB will sanction the first of a series of rate increases in July or September, after the Bank of England and the US Federal Reserve had already started to hike rates as inflation flares.     

However, Professor Kieran McQuinn at the Economic and Social Research Institute, or ESRI, said there was a potential "silver lining" that may persuade the ECB to increase rates less aggressively than its peers.     

In the eurozone "unlike in the US, one thing that strikes you is that there is no real evidence yet of the wage-price spiral that policymakers are always particularly concerned of when it comes to interest rates and inflation", Prof McQuinn told the Irish Examiner.  

Though the picture may change, wages are growing in the eurozone much slower than the inflation rate of 7.4%, while US wage inflation is growing strongly, data show.    

Calm housing market

"A mild" increase in interest rates by the ECB could help calm the Irish housing market amid the "unsustainable" double-digit rises in house prices, he said.    

The ESRI is sticking to an earlier forecast that Irish consumer price inflation — which is running at 7% — will peak at just over 8% in the summer, before easing to 6.7% for the year as a whole, Prof McQuinn said. 

The ESRI still sees the Irish economy growing strongly this year, even as global demand for Irish goods and services eases somewhat. 

New figures show inflation in Britain had reached 9% in April, the highest since the Thatcher era of 40 years ago. Sterling fell on concerns the inflation numbers could herald a sharp economic slowdown in Britain.  

Any economic contraction in Britain would affect small Irish exporters, in particular, that rely on the British market, economists say. 

Meanwhile, UK pubs chains said they were raising prices. 

Marston’s said it was handling higher costs by cutting costs and increasing prices. 

Rival bars and restaurants owner Mitchells & Butlers — in which JP McManus and John Magnier hold significant stakes — said increasing costs represent a “significant challenge” to the industry. 

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