ECB Economic Bulletin: Growing Wage Pressures Driving Persistent Underlying Inflation

19 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank said on Friday that recent wage agreements posed an upside risk to the inflation outlook, with wage pressures becoming an ever more important driver of underlying inflation.

In its latest Economic Bulletin, the ECB said that ‘developments in wages and other labour costs are increasingly becoming a factor in the persistence of underlying inflation in the euro area.’

Data pointed towards a ‘strengthening of wage pressures’, with recent negotiated wage agreements having ‘added to the upside risks to inflation’, which would be ‘exacerbated if profit margins remain high’, the ECB said.

‘Wage negotiations concluded in recent months suggest that wage pressures have continued to strengthen in 2023’, according to the bulletin. The extent to which these pressures would feed through to underlying inflation would ‘depend on developments in profit margins, with aggregate national accounts data for the fourth quarter of 2022 pointing to a strengthening of the pressures coming from this source.’

High underlying inflation numbers suggested that earlier surges in energy input costs and past supply bottlenecks were ‘still feeding through’ to core inflation measures. Services inflation was ‘probably still being driven by pent-up demand from the reopening of the economy and rising wages’, the report said.

The dynamics of underlying inflation, which the ECB is watching closely as it decides how much further to hike its key interest rates, were still surrounded by uncertainty, according to the ECB, though ‘the short-term growth rates of several indicators of underlying inflation, measured in terms of month-on-month or quarteron-quarter developments, have started to point to some moderation in price pressures.’

Such a moderation in underlying inflation ‘would be consistent with the notion that these measures include indirect effects of the past energy price surge which are now gradually unwinding, with energy price developments having moderated for several months now’, the ECB said.

Despite an easing in wholesale inflation, import and producer prices remained elevated, indicating ‘cumulative pipeline pressures that could keep consumer price inflation for non-energy industrial goods high for some time’, the ECB said.