Governor says Iceland could have gained purchasing power with less inflation

Iceland could have achieved the same increase in purchasing power over the past four to five years with lower nominal wage rises, less inflation and lower interest rates, Central Bank of Iceland Governor Ásgeir Jónsson told mbl.is. He said this would have saved the national economy substantial sums because inflation carries a cost for society.

Jónsson has repeatedly raised concerns about wages and Iceland’s competitiveness. He has said wages are now the highest in Europe when payroll-related charges are included, which could harm the competitiveness of export industries, including tourism.

Asked why the issue is not discussed more often, Jónsson said Icelanders readily compare interest rates and prices with those abroad but seem less inclined to compare wages. He said high wages and high output per person are positive, but wages must also be considered in relation to other factors.

Jónsson said wage increases should be assessed by their effect on purchasing power, rather than by the nominal increase in pay. He said the Salek agreement aimed to raise purchasing power through greater stability and lower inflation, rather than large wage rises. More recently, debate has focused on direct wage increases and adjustments, including whether nominal increases feed through to prices.

Jónsson said achieving the same purchasing power in an environment of lower inflation and interest rates would bring a considerable improvement in living standards. He said there are no direct measurements for Iceland of inflation’s cost, but research indicates that the cost can be substantial and rises relatively quickly beyond a certain level. He added that people in Argentina know this cost well.