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Volkswagen pay deal touches inflation nerve

Volkswagen pay deal touches inflation nerve
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First Published: Tue, Feb 08 2011. 04 29 PM IST
Updated: Tue, Feb 08 2011. 04 29 PM IST
Hannover: Volkswagen and German unions agreed to a substantial wage hike on Tuesday, adding to concerns of policymakers already facing the prospect of above-target inflation in the euro zone rising further.
The 3.2% pay rise for around 100,000 workers raised the prospect of other sectors gaining similar inflation-busting increases this year, although economists said the effect on European Central Bank thinking would not be dramatic.
The deal, struck in the early hours of Tuesday after marathon talks that started on Monday, also includes a one-time payment of 1% of annual wages or at least €500 per person at Europe’s largest car maker and runs for 16 months from 1 May.
Union IG Metall had demanded a 6% wage increase.
“The Volkswagen deal could raise concerns if it leads to a trend, but we would have to first see second round effects, and similar moves in other countries before the ECB moves on interest rates,” said Claudia Windt from Helaba.
Euro zone inflation hit 2.4% in January, above the ECB’s target of close to but below 2% for the second month running.
In the same month, German inflation hit 2%.
ECB policymakers say they expect inflation to subside further out but have sharpened their warnings that interest rates will rise if it does not.
A wage-price spiral, where buoyant economic conditions and rising prices push workers to secure higher pay, would be a major concern for central bankers intent on controlling inflation.
The latest Reuters poll of economists found a narrow majority expecting a first ECB rate hike from a record low of 1% in the last quarter of the year.
Little inflation alarm
Germany is so dominant economically within the euro zone that the ECB will be more attuned to signs of price pressures there than anywhere else. But most analysts said the deal was moderate enough to keep the central bank relatively sanguine.
“Overall, the ‘headline settlement’, while being higher than the sector wide 2.7% headline pay increase in 2010, appears to be a signal for ongoing wage moderation,” said Thorsten Polleit at Barclays Capital.
Sluggish growth and prices in Germany, where consumer prices account for just over a quarter of the weighting for euro zone inflation data, have generally offset rapid inflation in smaller states such as Ireland and Spain.
Now, higher wage demands, loose monetary policy and rising food and fuel prices may create the opposite situation.
The booming auto sector however stands out from other parts of the Germany economy, such as the chemicals sector, where profits are not as impressive.
So busy is Volkswagen that it briefly shut down its assembly line in Wolfsburg -- where it makes about 3,000 cars a day -- last month because its suppliers were unable to deliver parts quickly enough to keep up with the pace of production.
Volkswagen shares were up 2.5% by 1115 GMT.
With the wage rise affecting a relatively small number of workers, and with public sector workers asking for a more modest pay rise small in their ongoing negotiations, the chance of a wage-price spiral appeared slim to economists.
“For the ECB it is probably not a big concern for the time being, particularly because unit labour costs are not likely to increase as a result,” said Juergen Michels at Citigroup.
“But it will increase the disposal income of German households, and that’s likely to support the outlook for consumption in Germany,” he said.
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First Published: Tue, Feb 08 2011. 04 29 PM IST