ECB’s Lagarde: Must Be Wary That Faster-than-Expected Wage Growth Doesn’t Fuel Inflation

31 December 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Saturday said that wage growth was likely exceeding expectations and that care had to be taken not to let this become a further source of inflation.

In an interview with Croatian daily Jutarnji list, Lagarde said that 2024 and 2025 would bring ‘recovery and a return to previous growth rates’, provided there were no further shocks in the meanwhile.

The latest across-the-board upward revision of inflation projections ‘is also the reason for raising interest rates, as well as for anticipating further rate hikes’, she said. ‘An important factor in this respect is that we must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect. We know wages are increasing, probably at a faster pace than expected, but we must be wary that they do not start fuelling inflation.’

Price pressures were initially supply-side in origin, she noted, but now it must be ensured that more domestic sources, in particular fiscal policy and wage developments, do not result in inflation becoming embedded.

Tighter monetary policy ‘is essential because it would be even worse if we allowed inflation to become entrenched in the economy’, she said. ‘We have a mandate to ensure price stability, and we have to fulfil it.’