Employees in the eurozone are recording real income increases again. For the ECB, however, the strong growth in collective wages means that interest rate cuts will be postponed for the time being.
The joy of European workers over the continued strong rise in wages is likely to cause a headache for the European Central Bank (ECB). Although the rise in negotiated wages in the Eurozone has slowed somewhat, it is still at a level that is hardly compatible with the central bank’s inflation target of two percent. This means that market players’ hopes of rapidly falling key interest rates continue to dwindle.
Collective bargaining wages rose by 4.46 percent across the eurozone in the fourth quarter, after wage growth in the previous quarter reached 4.69 percent, the highest level since 2005. The ECB has highlighted wages and salaries as the key variable in deciding whether it can cut interest rates and end its battle against high inflation. ECB chief economist Philip Lane is of the opinion that wage growth of around three percent is compatible with the inflation target of two percent. But he believes labor income will likely rise faster this year as workers still need to make up for lost income due to inflation.
“No all-clear” on inflation
According to Commerzbank economist Marco Wagner, “no all-clear” can be given with regard to inflation. “Already existing collective agreements evaluated by the ECB indicate that wage growth will continue to be high in the current year,” emphasizes Wagner. “In addition, the proportion of companies expecting price increases is increasing again.”
It will probably take a few more months before wage growth slows to a level compatible with the inflation target, suspects ING economist Bert Colijn. “We expect a more significant decline in nominal wage growth before the summer,” he told Reuters.
Many economists expect the ECB to start cutting interest rates in the summer as inflation pressures ease. Until then, rising wages are good news for many employees. Because the inflation rate has already fallen to around three percent, they have been able to achieve real income growth again.
Source: Stern
