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August 7, 2008

WAGE RISES TO BATTLE INFLATION – LUFTHANSA LEADS THE WAY

Lufthansa employees won the battle with inflation, for the time being, as they managed to get a 5.1% raise in their wages, after a week’s strike and hard negotiations with the German airline’s management team.

But unfortunately, the European Central Bank (ECB) doesn’t share the same feelings, as they struggling to contain inflation by means of monetary policy, even if the high interest rates are cooling (freezing) down the economy growth.

The benchmark interest rate remained unchanged today at 4.25%, as Trichet continues warning about wage inflation which eventually will lead companies to hike prices to cope with rising production costs.

Otmar Issing, a former ECB chief economist advised companies to make one-off payments to their worried employed, or bonus, instead of offering wage rises that will permanently affect the company’s fixed costs.

Good thought, Otmar! But then again, I wouldn’t fall in this trap, and I hope you don’t either when you have that quick I’d-rather-not-have-this-conversation-with-you-right-now meeting with your boss! Let me explain you why.

First of all, the good news is that there is a 50-50 percent chance that companies will not pass the wage rises onto the customers, and they will keep their prices stable, as the economy is slowing down and they will need to hold on tight to their sales, even if the profit margins will shrink.

The bad news is that any change in the official bank rates takes around two years to have its full impact on inflation, just as Bank of England admits openly on their website. So, if central banks decide the interest rates based on what the inflation will probably be over the coming two years or so, so should consumers.

A permanent wage rise aligned with the rise in inflation does even count as rise, since the consumer’s purchasing power remains the same. This is not the case with bonuses, or any other forms of one-off payments, as the money you receive today will become of less value tomorrow if inflation continues its upward trend, and business activity slows.

No wonder why working unions in Germany have already started pressing for pay rises that match the inflationary economic environment.

Inflation in the 15-nation euro region was 4.1% in July, mainly due to record oil and food prices, making the Eurozone the worst performing economy across the globe.

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