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2022/01/14 / Erste Group Research

What does labor market recovery mean for inflation?

On the surface, the situation on the Eurozone labor market has eased further with the latest available data (November 2021). At 7.2%, the official unemployment rate has already fallen below the pre-crisis level. However, in our view, generous short-time work programs in some countries continue to help cushion the official unemployment rate.

From a financial market perspective, the key question is at what point could the tightening labor market cause rising wage pressures. The pandemic has heavily distorted the data for labor costs and wages. But a four-quarter average shows that, by 3Q21, the downward trend in Eurozone wage growth should have come to an end.

Although the US inflation rate published for December showed a further increase and reached the highest level since the early 1980s, bond markets reacted with lower yields and the dollar weakened. One reason was that the 7% y/y reading was in line with expectations, removing uncertainty from the market. Another reason was that price pressure essentially came from "known" price drivers.

Perhaps also playing a role for the markets was the fact that December’s reading probably represents the peak of US inflation for the time being. In the course of 2022, inflation rates are very likely to fall.

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General information

AuthorErste Group Research
Product nameWeek ahead
Topic in focusMacro/ Fixed income
Economy in focusEurozone, United States
Currency in focusEuro, US Dollar
Sector in focus-


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