From wages to inflation

In the cases of the United States, the euro zone and the United Kingdom, we look at how wage increases translate into headline inflation in terms of consumer prices. To analyse this transition from wage growth to headline inflation, we need to look at: The rate of wage growth; The rate of growth in productivity, and therefore in unit labour costs; The change in profit margins, which leads to growth in the GDP deflator; Growth in import prices, which leads to headline inflation for consumers. We see that in 2023: In the United States, headline inflation was higher than the rise in the GDP deflator, due to the rise in profit margins; In the euro zone and the United Kingdom, headline inflation was lower than the rise in the GDP deflator, due to the decline in profit margins and in import prices. The gap is very wide in the euro zone: in 2023, unit labour costs rose by 5.8% year-on-year, while headline inflation rose by 2.6%.