20180711-NATIXIS-The_major_implications_of_the_low_price_indexation_of_nominal_wages_6页_667kb

Flash Economics: Low Price Indexation of Nominal Wages

Core Content

This document discusses the implications of the low price indexation of nominal wages in the United States and the euro zone, based on an econometric analysis of wage formation over the period 2002–2017. The findings indicate that nominal wages in these regions are highly inert to inflation, meaning they do not adjust significantly in response to price changes.

Key Findings

• Price Indexation of Wages:

  • The U.S. has a price indexation of 0.08.
  • The euro zone has a price indexation of 0.27.
  • These low values suggest that nominal wages do not react strongly to inflationary pressures.

• Implications of Low Indexation:

  1. Oil Price Increases:

     • Sharp increases in oil prices reduce real wages significantly due to the lack of nominal wage adjustment.
     • This leads to a decline in household consumption.
     • The second-round effects (increases in core inflation) are small, so oil price shocks do not significantly drive up core inflation.
     • Consequently, central banks are unlikely to tighten monetary policy in response to oil price increases.

  2. Exchange Rate Depreciation:

     • A depreciation of the exchange rate (e.g., the euro or dollar) leads to import inflation, which reduces real wages.
     • This negatively impacts domestic demand.
     • The low wage-price indexation means that nominal wages do not adjust, thus corporate profits are not significantly affected.

  3. Impact on Corporate Profits:

     • Inflationary shocks (oil prices, exchange rates) do not significantly reduce corporate profits due to the limited adjustment in nominal wages.
     • The rise in oil prices since 2016 has not led to a major decline in profits, but has significantly reduced real wages.

Summary of Effects

• Inflationary Shocks:

  • Do not lead to significant increases in core inflation.
  • Lead to sharp reductions in real wages and domestic demand.
  • Central banks are not prompted to adopt more restrictive policies.

• Household vs. Corporate Impact:

  • Households are more affected by inflationary shocks, as their purchasing power declines.
  • Corporations are less impacted, as profits remain relatively stable.

Conclusion

The low price indexation of nominal wages in the U.S. and euro zone is a critical factor in how inflationary shocks are transmitted through the economy. It implies that:

• Oil price increases and exchange rate depreciation negatively affect household consumption and real wages, but do not significantly raise core inflation.
• Central banks may not respond with tighter monetary policy.
• Corporations are less affected by these shocks in terms of profitability.

This understanding is essential for policymakers and investors to anticipate the economic consequences of inflationary pressures in these regions.

Disclaimer Highlights

• The document is intended for professionals and qualified investors.
• Confidentiality: Not to be disclosed to third parties without consent.
• No liability: Natixis and its affiliates do not accept liability for the distribution, use, or content of the document.
• No personalized recommendation: The document is for general information only and does not constitute investment advice.
• Regulatory compliance: The document is subject to regulatory restrictions in various jurisdictions, and recipients are advised to comply with local laws.

Legal and Regulatory Information

• Supervision and Authorization:
  • Supervised by the European Central Bank (ECB).
  • Authorized in France by the ACPR.
  • Regulated in France by the ACPR, in UK by FCA and PRA, in Germany by BaFin, in Spain by ACPR and CNMV, in Italy by Bank of Italy and CONSOB, and in Dubai by DFSA.
• Distribution Restrictions:
  • Limited to professional investors in Hong Kong.
  • Not registered as a dealer in Canada or Australia.
  • Available only to major U.S. institutional investors in the United States.

This summary highlights the economic implications, key findings, and regulatory context of the low price indexation of nominal wages in the U.S. and euro zone.