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"Monetary Review - 3rd Quarter 1998"



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Prices and labour market

Besides deterioration in the current account excessive growth in demand also easily leads to inflation. So far, however, inflation measured by consumer prices is low. The Table shows the development in consumer prices and the index of net retail prices.

Table 1 Development in consumer prices and net prices
  Con-
sumer-
price
index		 Index of
net
retail
prices		 Energy Imports Domestic prices
Total Food-
stuffs		 Rent Public
services		 Other
factors
Weighting
1.000 0.085 0.142 0.773 0.160 0.233 0.046 0.334
Year-on-year growth, per cent
1991 2.4 2.6 1.6 2.7 2.7 0.5 3.4 4.4 3.1
1992 2.1 2.1 - 3.8 2.5 2.5 1.8 2.0 2.9 3.2
1993 1.3 1.4 - 0.9 0,0 1.9 - 0.2 2.1 1.7 2.7
1994 2.0 1.6 - 3.1 2.1 2.0 3.0 1.6 2.4 1.6
1995 2.1 1.9 - 2.5 2.5 2.2 3.1 1.8 2.5 2.0
1996 2.1 2.0 6.6 0.1 1.9 1.7 1.6 1.1 2.4
1997 2.2 2.2 2.7 0.9 2.4 3.6 2.8 2.2 1.8
1996 1st qtr. 1.8 1.7 4.1 0.8 1.6 1.1 1.4 1.9 1.8
2nd - 2.0 1.8 5.9 0.1 1.8 1.2 1.4 1.5 2.4
3rd - 2.3 2.1 7.0 - 0.2 2.1 2.1 1.4 0.4 3.0
4th - 2.4 2.2 9.5 - 0.2 2.1 2.3 2.0 0.5 2.5
1997 1st qtr. 2.2 2.3 5.8 0.3 2.3 2.0 2.6 1.7 2.6
2nd - 2.1 2.1 1.6 0.6 2.4 3.5 2.8 2.2 1.8
3rd - 2.4 2.5 3.4 1.1 2.6 4.4 2.9 3.4 1.6
4th - 2.1 2.1 0.1 1.7 2.3 4.3 2.7 1.7 1.3
1998 1st qtr. 2.0 1.8 - 1.7 1.4 2.3 4.1 2.5 - 0.4 1.6
2nd qtr. 2.0 1.7 - 0.7 0.9 2.0 2.5 2.1 - 1.5 2.3
July 1.8 1.3 - 0.8 0.7 1.6 0.8 1.9 - 2.1 2.4
Note.: Weighting basis as of September 1996. The compilation of import prices includes a lag.
The index of net retail prices is the consumer-price index adjusted for indirect taxes, duties and subsidies for general price reductions.
"Other factors" is a measure of domestic market-determined inflation. "Other factors" normally increases faster than the index of net retail prices due to an overweight of services for which the price development is typically stronger than for other commodities, due to such factors as traditionally lower growth in productivity in the service sector than in other sectors. At the same time the demand for services viewed in a more long-term perspective will typically increase faster than the demand for other products.

Inflation measured instead by the year-on-year increase in the EU-harmonized index of consumer prices, HICP, was at 1.4 per cent in July, equivalent to the rate of inflation in the euro area. HICP is used by the European Central Bank, ECB, and since international comparability is vital increasing focus on HICP rather than national consumer-price indices can be expected.

Wage increases in Denmark are definitely high, cf. Chart 7. The rate of wage increases in Denmark was 4 per cent in 1997 and is estimated to be 41/2 per cent or more in 1998, which is higher than among Denmark's trading partners. Unemployment is now down to 6.5 per cent and below 5

Picture: Chart 7 Wage increases in Denmark and abroad / Chart 8 Manpower shortfall in manufacturing and in building and construction

per cent measured by the EU-harmonized compilation standard. This is far below the average for the euro area of more than 11 per cent. The labour market is generally tight. There is a particular risk of a shortfall of skilled manpower, especially in building and construction, cf. Chart 8. However, manufacturing does not report the same danger. There is thus no looming pressure as in 1986. Initiatives to effectively increase the supply of work are essential to prevent further pressure on the labour market.

Since 1993 housing prices have increased by around 10 per cent per annum. Since this is an incentive to raise new loans and increase consumption, it intensifies the pressure on the economy, cf. Chart 9. Prices

Picture: Chart 9 Cash sale prices for one-family houses

for capital assets - including share prices - fluctuate more than consumer prices and wages and therefore normally change some time before ordinary consumer prices and wage rates. Most recently Danish share prices dropped somewhat, among other things as a nervous reaction to the crisis in Asia. However, in the light of the strong rise in 1997 the decline in share prices in August is very moderate.
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Version 1.0 November 1998 Nationalbanken.
Published by Danmarks Nationalbank November 1998, http://www.nationalbanken.dk