ECB’s Lagarde: Wage Pressures to Continue Driving Inflation

26 February 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday said that remaining wage pressures would continue to affect inflation ahead.

In a speech at the European Parliament plenary in Strasbourg, France, Lagarde said, ‘Wage pressures, meanwhile, remain strong. Wage growth is expected to become an increasingly important driver of inflation dynamics in the coming quarters, reflecting employee demand for inflation compensation and tight labour markets.’

The wage increases were being partially absorbed by profits instead of being fully passed to consumers, a phenomenon that was being closely monitored by the ECB, she said, addressing questions from members of the Parliament.

‘So we are observing that very, very closely because it’s a key factor, it’s a key driver, but we are gradually seeing that wage increase caused by the two factors that I have mentioned being actually partly absorbed by the profit contribution to inflation, which has reduced’, she said.

Profits, which had been responsible for 50% of inflation, were responsible for only 25% during the second half of 2023, she said. ‘[W]hat we are seeing gradually, because of pression on demand, [is] a reduction of profits because they absorb some of the wage increases.’

‘Looking forward, we expect inflation to continue slowing down, as the impact of past upward shocks fades and tight financing conditions help to push down inflation’, she said.

Second-round effects shouldn’t be a concern, as ‘our restrictive monetary policy stance, the ensuing strong decline in headline inflation and firmly anchored longer-term inflation expectations act as a safeguard against a sustained wage-price spiral’, she said.

The Governing Council would continue to follow its three criteria, namely the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, in the following monetary policy decisions, she said.

‘The current disinflationary process is expected to continue, but the Governing Council needs to be confident that it will lead us sustainably to our 2% target’, she said.