Eurozone: Unemployment Continues to Decline, but Price Pressures Missing - ING
Bert Colijn, Senior Economist at ING, suggests that Eurozone’s inflation
last week, turned out to have remained in negative territory at -0.1%
in March, while the unemployment rate showed another decline in
February.
Key Quotes
“This marked the
13th month of consecutive declines in the number of unemployed, while
prices are still declining. As people return to employment, price
pressures usually emerge through improved spending. This relationship is
called the Phillips curve, which now seems to behave less accurately.
Debate
about the validity of the Phillips curve has been going on for decades,
but while the Eurozone Phillips curve has worked quite well over the
years, it now seems that there is a breakdown of the relationship. The
unemployment rate has come down over the past years, but inflation
remains negative. This is of course mostly because of the exogenous
shock in oil prices, but even core inflation has been stagnant since
mid-2015. With an improving labour market, should price growth not be
moving?
While the recent behavior of the indicators suggests that
there has been a breakdown in the relationship, it seems that that
might not actually be the case. The relationship is strong and the
behavior in 2015 has not been unusual. This is because the Phillips
curve for the Eurozone is quite shallow. For every reduction of 10 basis
points in the unemployment rate, there is a change of just 3 basis
points in core inflation.
Since July last year, this is exactly
what has happened; the unemployment rate has come down from 10.8% to
10.3%. This should have resulted in a core inflation rate of 1.1%, but
we currently see a rate of 1% for the March number. Given all the other
factors that can influence such a monthly number, this does not give
reason to assume that the Phillips curve has lost its relevance in the
current economic environment.
The flat Phillips curve does bode
concern for the recovery of inflation. It means that unemployment has to
be well below 9 percent for core inflation to return to the ECB target
of “just below 2%”. Even at the current pace of 0.9% declines in the
unemployment rate per year, this means that it will be a while before
the labour market starts to give significant price pressures in the
Eurozone.”
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