Real risk of wage-price spiral in Germany, Deutsche Bank says

LONDON (Reuters) - German metalworkers' recent demand for an 8.2% pay rise may be a sign that a wage-price spiral, the missing component in European inflation, is about to kick in, Deutsche Bank said on Tuesday.

The bank said that a demand by IG Metall's union for an 8.2% pay increase over 12 months for 76,000 steel industry workers was above anything seen in recent years.

It noted that while in normal times, wage settlements tend to be around 50% of unions' initial claim, "these are not normal times" given surging inflation.

German inflation hit an annual 7.8% in April, the highest in more than four decades. But much of this is down to energy and food prices, so policymakers are watching to see if higher costs feed through to wage-hike demands, which in turn would raise the long-term inflation profile.

Reflecting the pressure for higher wages, Deutsche's proprietary pan-German wage pressure gauge has shot to the highest level in the index's history dating back to 1992, the bank said. The German Labour Agency's job vacancy index also reached a new record high in April, Deutsche added.

Tight labour markets should allow unions "to flex their muscles", Deutsche said, noting there was anecdotal evidence companies are starting to compensate workers for higher inflation, on top of collectively agreed pay.

Roughly half of 2022 pay increases were set in 2021, when inflation was not so much in focus, they said.

"Still, the message seems clear. There is a clear risk that our current forecast of an annual 3.5% rise in 2022 effective wages might be too low," Deutsche added.

(Reporting by Dhara Ranasinghe; editing by Sujata Rao and Ed Osmond)