After rising sharply from 1% in September, inflation in Germany has moderated somewhat. In April 2008 it dropped to 2.41% from 3.10% in March. So far, inflation has not been a serious threat to the economy. Indexes (2005=100) of compensation of labor and the CPI, are shown in the first chart. Compensation has generally managed to exceed inflation, as a result real wages have advanced moderately.

From the standpoint of business, wage growth has been below the growth in productivity so that unit labor costs have continued to decline, as can be seen in the second chart. Since the unit labor cost data are available only quarterly, the monthly wage and productivity data are aggregated to a quarterly basis. The latter are available for the first quarter of 2008, while the ULC data are only available for the fourth quarter of 2007.

The recent trends in food and oil prices suggest that the future impact of inflation may be less benign.