ECB sees ‘very strong’ wage growth ahead in next few quarters

Bloomberg

The European Central Bank (ECB) predicts wage growth — a key indicator of where inflation is headed — will be “very strong” in the coming quarters, strengthening the case for more interest-rate hikes.
A study of salary developments since the start of the pandemic shows underlying pay growth has been “relatively moderate” and is currently close to its long-term trend, the institution said on Monday in an article to be published in its Economic Bulletin.
Even so, “looking ahead, wage growth over the next few quarters is expected to be very strong compared with historical patterns,” it said. “This reflects robust labour markets that so far haven’t been substantially affected by the slowing of the economy, increases in national minimum wages and some catch-up between wages and high rates of inflation.”
Price gains have exceeded the ECB’s 2% goal for the past 1 1/2 years and surged above 10% in late 2022. While inflation has since come off its peak, an underlying gauge that excludes volatile items like food and energy hit a record high in December.
With forecasts showing 2% inflation will be elusive until end-2025 and trade unions pushing for generous compensation packages, the ECB has delivered an unprecedented series of rate increases that took the deposit rate to 2% last month.
President Christine Lagarde has flagged another half-point hike at February’s meeting — “and possibly at the one after that” — to avoid a wage-price spiral.
Weaker economic growth is unlikely to help much in the near term, particularly as a shortage of skilled labour encourages businesses to retain workers and pay them well.
It will take several years for salaries to fully adjust to recent shocks, according to ECB Chief Economist Philip Lane, who’s argued monitoring pay will form a large part of understanding the inflation trend.
In its article, the ECB said “there are signs of stronger wage growth in services sectors,”
primarily in those lacking staff.
It also said that “beyond the near term, the expected economic slowdown in the euro area and uncertainty about the economic outlook are likely to put downward pressure on wage growth.”