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Wages have been rising faster than productivity in many European countries for the past few years, yet signs of underlying consumer price pressures remain limited. To shed light on this puzzle, this paper examines the historical link between wage growth and inflation in Europe and factors that influence the strength of the passthrough from labor costs to prices. Historically, wage growth has led to higher inflation, but the impact has weakened since 2009. Empirical analysis suggests that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability. Thus the recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.

Inflation --- Labor --- Macroeconomics --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Price Level --- Deflation --- Wages, Compensation, and Labor Costs: General --- Labour --- income economics --- Labor costs --- Producer prices --- Wage adjustments --- Prices --- Switzerland

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Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

Capital investments. --- Industrial equipment. --- Industrial equipment industry. --- Industries --- Capital equipment --- Capital goods --- Equipment, Capital --- Equipment, Industrial --- Machinery --- Capital expenditures --- Capital improvements --- Capital spending --- Fixed asset expenditures --- Plant and equipment investments --- Plant investments --- Investments --- Equipment and supplies --- Exports and Imports --- Macroeconomics --- Taxation --- Production and Operations Management --- Trade: General --- Macroeconomic Aspects of International Trade and Finance: General --- Price Level --- Inflation --- Deflation --- Economic Growth and Aggregate Productivity: General --- Trade Policy --- International Trade Organizations --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- International economics --- Public finance & taxation --- Imports --- Labor productivity --- Producer prices --- Tariffs --- Trade barriers --- International trade --- Production --- Prices --- Taxes --- Tariff --- Commercial policy --- United States