Bergström: The economic scope for wage increases

"Providing inflation expectations are in line with the inflation target and that prices are not affected by anything other than cyclical factors, it is reasonable to assume that inflation will meet the target once the economic resources are fully utilised. However, if potential growth is likely to be exceeded, the signs of overheating risk increasing together with increased inflationary pressure. In some cases, we can asses that inflation will nearly achieve its target, at least for a period of time, despite the fact that the utilisation of resources is strained and that, because of this, wage increases will be higher than is reasonable in the long term", said Villy Bergström, Deputy Governor of the Riksbank, in a speech on Tuesday at a seminar in Industrihuset organised by the Mediation Institute.

 

"In some cases, deregulations, a fall in oil prices and a strengthening of exchange rates can be assessed as counteracting the upward pressure on prices that is the result of a long-term unsustainable demand. If we assess that inflation expectations are stable, our monetary policy adjustments will to a high degree be affected by the assessment of the durability of the tension between demand and supply. After all, we do not primarily pursue stabilisation policy, but it is our job to maintain price stability."

 

"When it comes to economic estimates of the scope for wage increases for wage-earners as a whole, these must be based on the assessed productivity growth within the entire economy and on the inflation target. In other words, if productivity growth is close to 2 per cent, the scope for wage increases will be 3.5 to 4 per cent. The assumption for such simple calculations is that the economy is reasonably balanced as regards such things as the division between profits and wages."

 

"However, considering the strong development in demand we anticipate for the coming two years, the signs of bottlenecks and labour shortages will probably increase and resource utilisation will become more strained. It will probably also be apparent in the form of some upward pressure on prices and wages. Sooner or later, the Riksbank will have to increase the rate if a spontaneous slowdown does not occur."