Leading German economics institute, Ifo, has released a report stating that wage increases have had little impact on inflation in Germany’s economy last year. This finding may provide support for the European Central Bank (ECB) to halt the process of raising official interest rates at its next meeting in September. According to Ifo, the main drivers of inflation in Germany in 2018 were higher input costs, including intermediate manufactured products, energy prices, and raw material prices. These factors accounted for 5.7 percentage points of the 8.3% rise in consumer goods prices. Increased profits were the second most significant driver, contributing 1.4 percentage points to inflation.
Timo Wollmershäuser, head of forecasts at Ifo, highlighted that some companies were able to expand their profit margins last year due to strong demand in consumer-driven sectors. He added that wages only accounted for 0.6 percentage points of inflation, indicating that a wage-price spiral has not materialized. The ECB, which has been increasing rates over the past year to combat inflation, may now have the opportunity to pause this process.
Although the ECB has completed a year of raising rates, there are hopes that it will call a halt in September. The central bank has been drawing attention to services inflation in the eurozone, which may influence its decision.