ECB: Price Pressures Intensifying; Looking Ahead, Wage Developments Key

23 June 2022

By David Barwick – FRANKFURT (Econostream) – Price pressures have become yet broader and yet more intense, the European Central Bank said on Thursday.

In its fourth economic bulletin of 2022, the ECB said, ‘Overall, inflationary pressure has broadened and intensified, and wage growth has started to pick up.’

‘While most measures of longer-term inflation expectations derived from financial markets and expert surveys stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring’, it added.

Many measures of core inflation are above 3% and a number have recently increased further, it said.

‘A large part of the upward push in underlying inflation dynamics can be attributed to indirect effects from the surge in energy and food prices and from exceptional developments in the balance between supply and demand related to the pandemic and the Russian invasion of Ukraine’, the ECB said. ‘Looking ahead, developments in wages will be a key factor for the future dynamics of underlying inflation.’

‘More recent information on those wage agreements that were concluded since the start of 2022 confirm some strengthening in wage dynamics, although wage growth remains contained compared with the current inflation rates’, the ECB said.

Compensation per employee increased by 4.4% in 1Q versus 3.8% in the last quarter of last year, but this was primarily a matter of more hours worked, and compensation per hour only rose 1.1%, it noted.

The Governing Council would ensure the medium-term return of inflation to 2%, the ECB said. As it continues to normalise policy, it ‘will maintain optionality, data-dependence, gradualism and flexibility’, the ECB said.

The ECB repeated its intention to hike in July by 25 basis points and in September by a potentially larger amount depending on the medium-term inflation outlook.

‘[B]eyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate’, the ECB reiterated. ‘In line with the commitment to its 2% medium-term target, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and how it assesses inflation will develop in the medium term.’