Meanwhile, the ECB’s QT marches on, balance sheet has shed €2.45 trillion since the peak, or 59% of its pandemic QE.
By Wolf Richter for WOLF STREET.
The ECB’s own measure of wage increases, its index of “Negotiated Wages,” is based on collective bargaining agreements after they were negotiated between employers and organizations that represent workers. It’s a forward-looking measure, reflecting wage increases that are going to be implemented soon. “Negotiated wages” cover about two-thirds of the Euro Area economy. These “negotiated wages” exclude bonuses, overtime, and other individual compensation that is not linked to collective bargaining.
And it blew a fuse today. In Q3, “negotiated wages” spiked by 5.4% year-over-year, according to the ECB today, after the false-hope deceleration in Q2.
In its June economic bulletin, the ECB explained: “Monitoring wages is a key element in the ECB’s approach to analysing the inflation outlook. This reflects the prominent role of wages in the dynamics of underlying inflation, in particular in the services component, which has remained persistent.”
It also said that the “outlook for further disinflation” was predicated “on the expectation of moderating wage growth.” Q2 brought the moderating wage growth, triggering the ECB’s initial rate cuts. Q3 blew all of this out of the water.
Big wage increases are obviously great for households, and a great way to stimulate demand, as households have more spending money, and they feel better, and so they spend more, creating more demand and more jobs, and more economic growth, and that’s great.
The ECB’s concern is that big wage increases also add to the fuel that keeps inflation going, particularly in services where wages are a big cost input that companies try to pass on via price increases that translate into higher inflation rates.
And services inflation has remained stubbornly hot in the Euro Area, despite the massive plunge in energy prices, and declines in prices of many goods. The services CPI accelerated to 4.0% year-over-year in October, after a deceleration in September, according to Eurostat earlier this month. It has been stubbornly rising at about 4.0% year-over-year since November 2023 (red in the chart below).
Services inflation of 4.0% is far too high to get to the ECB’s 2% inflation target, once the drop in energy prices ends, and goods prices return to normal patterns.
The services CPI started surging in 2022 to reach 5.6% in mid-2023. It then decelerated through November 2023 to 4.0%, and has gotten stuck there – more than double the year-over-year increases in the 10 years before then.
Core CPI, which excludes food, energy, tobacco, and alcohol, has been rising by roughly 2.7% year-over-year since April (blue).
This jump in negotiated wages will translate into hefty actual wage increases when they’re implemented over the coming months and next year, which will then feed further into the stubborn services inflation. The ECB governors are going to have their hands full trying to agree on how little and how slow to cut to not make inflation worse. But rate cuts are not permanent. If inflation re-heats further, the ECB can always nudge its policy rates back up.
Meanwhile, the ECB has been making progress with QT. Total assets dropped to €6.38 trillion, down by €2.45 trillion from the peak, according to its balance sheet released yesterday. It has unwound 59% of its pandemic-era QE so far:
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As has been expected. Wolf just has the unbiased data to show it to be the case. Moving forward, I expect all inflationary metrics to increase. To quote an insurance agent friend of mine in regard to the stubbornly high services inflation. I believe his exact words were “insurance has become like the protection rackets of the 60’s and 70’s”. When I asked him what that meant he simply said “fuck you, pay me.”
Your description is not how insurance works at all.
Insurance is more polite and not in person?
Try not paying your insurance on mortgaged property and let us know how that turns out for you. Insurance is, in may ways, a protection racket that you simply must pay.
The sneaky snake get by just fine, eating a few rodents along the way.
Speaking about rising wages for the Europeans, the cunning sneaky snake lives a life unburdened.
Not just rodents. Toads too…
There are around 22 individual classes of insurance coverage. In the case of dwelling/homeowner insurance you are paying for the risk of loss from certain specified perils such as fire and others for which there is a very real cost to the insurance based on the law of large numbers in order to insurance against the risk of loss to yourself or the owner of the property if their is a mortgage.
It’s more like collusion protection racket. 😁
A lot of the increases are a result of increased lawlessness. Those in power let crime run rampant and we all pay more “protection” money as a result.
I’d be curious if any readers abroad are seeing big increases. I suspect insurance costs are pretty low in japan, as an example of my thesis.
Insurance is about spreading risk and the insurance companies and reinsurers have to make an underwriting profit for the whole system to survive. A lot of people say insurance companies are greedy and of course they want to make (a lot of) money, but the last few years have really been a race to get insurance rates to keep up with losses from the latest and greatest insurance scams, increased materials and labor costs to restore property, and to an extent lawlessness and stupidity (a lot of claims result from stupidity). What else can you do though, gotta pay for it and then pray you don’t need to use it. It’s one of those gambles in life, a lot of people choose to drive uninsured and a lot of homeowners without a mortgage choose to “go bare” – one of those is illegal and not enforced enough, the other is a choice that has pros and cons.
The California DMV requires all automobile/vehicle insurers to provide proof of coverage electronically and will not issue renewal registrations to any vehicle owner who does not have insurance so they may not use public roads.
“greatest insurance scams, increased materials and labor costs to restore property, and to an extent lawlessness and stupidity”
Of these 3, the only one that makes sense is #2, property restoration.
The problem, as I see it, is that Allstate, et al are spreading the risk of hurricane destruction across all of these states the 43 or so states that have no hurricane risk. Sure tornados do a lot of damage but it’s very localized compared to hurricane.
I have no doubt that a major part of my 40% increase in home insurance rates over the last three years is directly attributable to my insurance company spreading the risk of the FLA hurricanes into my premiums.
At some point, Congress will have to get involved to change our insurance is divided up. IMHO, my risk / premium should be equal to the risk of all the types of losses an insurance company can expect from my county.
This way, those people in Tampa will have to pay the full cost of insurance increases rather than it being spread around the country to counties that have nothing to do with hurricane risk.
Their in the very profitable business of insuring it all, their administrative costs are 800% more than Medicare as they put up great walls of bureaucracy in the way of paying claims, property insurance costs be nothing but if you live in a high likelihood area of weather intensification but have never paid the true cost of your insurance then it’s hard to have sympathy at such an early juncture of the true costs being realized
I have a rental property with “too many claims” as justification for insurance company to drop coverage. But also turns out that my insurance claim records are stored in a “5 year look back” shared database and no other insurance company will provide coverage now until I’ve got a clean past 5 years. So now I have state provided insurance as last resort. Also, turns out that contacting a claims adjuster for an estimate even if not going through with filing the insurance claim also counts towards “too many claims”.
Well in the 70’s inflation really hit hard at first. Then it came back again and again and really did not do too much damage after those initial terrible times.
You can lookup stock, bond and treasury returns for those years.
MW: US Treasury yields rise by most in a week amid focus on prospects for US economy
Thinking ECB and Fed are both going to have to quit QE and May be, just maybe have to start QT again. Their wage projections look like we just went through, +5%.
You got something mixed up. The Fed “quit QE” in early 2022 and has done $2 trillion in QT since then — and STILL going strong. The ECB “quit QE” in mid-2022 and has done €2.4 trillion in QT since then, see last chart in the article above.
Yes I had it backwards. Good stuff WR, makes you think!
QE = Quantitative Easing
QT = Quantitative Tightening
It’s like playing whac-a-mole. First durable goods spikes in inflation, and the central banks hit it, then services pops up and the central banks attempt to hit THAT.
Capitalism suffers a few defects, two of which are: (1) a follower’s mentality where companies pile into a few sectors, the same few sectors, to make money; (2) a desire to price-gouge, to grab extra coin from the hapless consumer whenever possible.
Persistent services inflation demonstrates both tendencies.
“First durable goods spikes in inflation, and the central banks hit it, then services pops up and the central banks attempt to hit THAT.”
You may be grossly overestimating the sharpness of the Fed’s tool(s).
Based on the fact that the ECB “has unwound 59% of its pandemic-era QE so far,” it seems like the USA has some catching up to do. Wolf’s Nov 7th piece states “Quantitative Tightening has shed 41% of the assets that the Fed had added during pandemic QE.”
I don’t know what question to ask about this discrepancy, other than point it out for others to comment on. If I asked a question, it would be a leading question and honestly just ill-informed.
The ECB did QE in two big ways: huge loans to banks and bond purchases. When it decided to start QT, it made the terms of the loans less attractive by raising the interest rates, and then banks paid off those loans on their own, and all those loans plus earlier ones have been paid back. That was the easy part of QT, and it amounted to €2.1 trillion. And that was a lot of bank liquidity to suck out of the system.
The slower part is rolling off the bonds it had purchased. And in that department, the Fed is far ahead.
Fed needs to quickly sell 3 trillion more back into market.
Looks like the wage increases are lagging inflation. We’re they not supposed to recoup their lost purchasing power? When I read things like “it was hoped wage growth would slow” all I hear is people with money were hoping to keep more money flowing to them at the expense of the working class.
Wage increases have been outrunning inflation since 2023. So wages are in the process of catching up. But in the early stages of the inflation shock, wage increases were outpaced by inflation by a wide margin.
Inflation is a slow-motion debt jubilee.
The only question is, how does it affect politicians, the majority of voters, asset holders and the donor class. That will guide the policy decisions.
Nations that used slavery also had low unemployment rates.