Central bank chief says further wage rises could fuel inflation

Signing an extension of wage agreements has reduced uncertainty over inflation, but further pay rises could push prices higher, Central Bank Governor Ásgeir Jónsson told mbl.is. He said it remained to be seen what VR, LÍV and Fagfélögin would do.

A broad coalition of Icelandic labour groups agreed on Tuesday evening to extend its agreements with the Confederation of Icelandic Enterprise. Jónsson welcomed the decision, noting that the three groups involved had also made the original agreement before other unions joined it.

The Central Bank kept its policy rate unchanged at 8 per cent. Inflation was 5.9 per cent last month. The bank’s Monetary Policy Committee cited international economic developments and the domestic labour market as the main sources of uncertainty.

Jónsson said wages had risen substantially and supported purchasing power, but he questioned whether companies could afford further increases. He said higher nominal wages were likely to add to inflation and might not bring much additional purchasing power, particularly as the outlook for businesses had darkened.

He added that Iceland’s experience with inflation over recent decades showed that wage increases feed through to higher prices.