ECB’s Lane: Core Inflation Momentum Remains Strong, With Wages Soon a Main Driver

6 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane said on Monday that the momentum of core inflation in the euro area was not showing signs of declining.

In a lecture at Trinity College Dublin, Lane told students that he expected that wages would soon become a main driver of underlying inflation in the Eurozone.

‘While there has been a clear turnaround in energy inflation and there are some signs of deceleration for food inflation, momentum for core inflation has not declined’ he said. ‘In particular, momentum in the goods category remains strong.’

Projections of higher wages ‘are expected to lead to a rotation toward wage growth as a main driver of underlying inflation in the euro area’, he said. Therefore, ‘the close inspection of the latest wage developments is a high priority in assessing underlying inflation.’

Current wage rises were not consistent with a return of inflation to the ECB’s target, he said: ‘nominal negotiated wage growth based on latest agreements is set to be higher this year compared with the level that would be consistent in the medium term with the two per cent overall inflation target.’

‘The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting’, he said.

The ECB would fight inflation ‘by bringing key policy rates to a sufficiently restrictive level and fostering a period of below-trend growth through the dampening of demand’, he said.

Monetary policy would have an impact by taming price and wage increases, he said: ‘the dampening of demand through the tightening of monetary policy means that price setters and wage setters are on notice that excessive price and wage increases will not be sustainable.’

Supply-demand mismatches due to the pandemic enabled some firms to increase profit margins, which had also contributed to inflation, he said. He predicted that ‘the extraordinary conditions underpinning profitability in 2022 should not persist, with a decline in profit margins translating into lower inflationary pressures.’

There were a number of factors also weighing down on core inflation, in his view. ‘Some passthrough should be expected’ from falling energy prices to underlying inflation, he said. Furthermore, ‘less upward pressure on the cost of living should mean a lower path for nominal wages’ than previously foreseen, also leading to lower underlying inflation.

Looking forward, he said that ‘the recent decline in energy prices could also be reflected much more quickly than usual in core inflation in the euro area.’

There was evidence that ‘the easing of bottlenecks is not yet feeding through into retail prices’, he said, suggesting that further disinflationary pressure could be forthcoming. Based on these developments, the ECB’s indicator for producer price pressures estimated ‘that the pressures on goods inflation are likely to be close to their peak and to decline over 2023.’

However, he warned that there were ‘upside risks to the extent that previous increases in pipeline pressures have not yet fully passed through to goods inflation.’

Measures of inflation expectations were mostly stable, he said, with surveys ‘suggesting that consumers interpret that there is a high temporary component in current inflation.’