ECB’s de Cos: Moderate Wage Growth, Squeezing of Trade Margins to Prevent Price-Wage Spiral

7 July 2022

By David Barwick – FRANKFURT (Econostream) – The projection of medium-term price stability rests on the assumption that moderate wage developments and reduced trade margins will prevent a price-wage spiral from emerging, European Central Bank Governing Council member Pablo Hernández de Cos said Thursday.

In a speech at the first annual Conference on the Spanish Economy of Banco de España, which he heads, de Cos said that ‘it should be emphasized that our projections on inflation, which currently anticipate that it will remain high in the coming months, but will moderate gradually thereafter to levels compatible with the ECB’s medium-term inflation target of 2%, is based on the assumption that there will be a slowdown in the growth of energy prices, in line with those on the futures markets, and that a moderate wage growth response and a squeezing of trade margins will prevent the emergence of the price-wage feedback loop.’

The gradual recovery path the Spanish economy is forecast to proceed along could see pre-pandemic output levels restored at the end of 2023, he said. However, the ‘extraordinarily high’ uncertainties around the outlook ‘are already having a negative impact on the world economy and have the potential to affect significantly growth prospects’, he added.

Should energy imports from Russia be cut off, this would shave between 0.8% and 1.4% off of Spanish GDP in the first year, he said, depending on how successful Europe was in finding alternative sources of energy.

‘In this uncertain scenario, one of the main worrisome developments is being the significant increase in the rate of inflation at the world, European and Spanish level’, he said, noting that Spanish inflation had hit 10% in June.

‘Moreover, although the price rises were initially concentrated in commodities and food and seemed to be relatively temporary in nature, in recent quarters their intensity has systematically surprised on the upside, spreading to the rest of the goods and services in the consumption basket and showing signs of greater persistence’, he said.