Most analysts continue to be too bearish on the Eurozone economy, and one area where there’s potential for further upside surprise is inflation. On the latest numbers the unemployment rate has dropped to an 8-year low of 9.1% in June (down from a high of 12.1). As seen in the graph below, the historical experience is that falling unemployment rate is typically consistent with accelerating wage growth. Adding to that, you often see cross-border spillover on wage growth due to the increasingly global nature of the labor market – and thus accelerating US wage growth should also add to the case.
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Looking at the CPI measures, core inflation has ticked up from a low of 0.6% y/y in 2015 to 1.3% in the July flash reading. One important trend in Europe has been, at aggregate, a rise in property prices. When you see ongoing and improving property price growth it is typically consistent with rising inflation, as the second chart shows. Taken together it looks like there's still ample scope for upside in Eurozone inflation, and this will have important implications for global markets: it makes it harder to the ECB to keep easing, and this will ultimately put upward pressure on bond yields and that will echo across global asset prices in this increasingly financially integrated world.
The historical link is that wage growth tends to accelerate when the unemployment rate is falling, so we should start to see gradual upward pressure on wages in the Eurozone.
Ongoing property price growth should add impetus to the nascent rebound in core inflation seen in the Eurozone, adding to the upside case for inflation, and making life harder for the ECB.
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Article by Callum Thomas, Top Down Charts
