The link between labor cost inflation and price inflation in the Euro Area

Abstract

To gauge inflationary pressures, policymakers generally pay close attention to labor cost developments. A key reason has been the widely held view that labor cost inflation (i.e., wage inflation adjusted for productivity developments) is one of the main causes of price inflation. From a theoretical perspective, this assumption represents the post- Keynesian cost-push/price-markup view of the inflationary process whereby wage increases in excess of productivity are seen as putting upward pressure on prices, and wages are the exogenous variable determining the future direction of inflation.