Eurozone wages are expected to rise faster than previously estimated by the European Central Bank. Good news? Not really: for ECB President Christine Lagarde, there is a risk that the upward trend in wage bills will push inflation even higher and create a kind of vicious circle.
“We know that wages are increasing, probably faster than expected,” Lagarde told the Croatian newspaper Jutarnji list. “We must not allow inflation expectations to get off the rails or wages to become inflationary,” the governor continued, recalling that the interest rate hike, which reached 2.5%, was part of the “necessary measures” to bring inflation down to 2%. currently 10% in the eurozone. “We must be careful that the internal causes that we see, which are mainly related to fiscal measures and wage dynamics, do not lead to a consolidation of inflation,” Lagarde warned.
Lagarde’s view echoes recent comments from, for example, the central governor of the Netherlands, Klaas Knot, who fears that “heavy” wage increases could encourage spiraling inflation instead of helping workers cope. The ECB expects wage growth in the euro zone of 5.2% for the coming year. A forecast that, however, does not coincide with that of 37 leading economists surveyed by the Financial Times, according to which the increase in payrolls will be rather cautious at around 4.4%.
Furthermore, Lagarde (like Knot) argues that the bloc’s expected winter recession, driven by rising energy costs, is likely to be brief and perfunctory, while it will be necessary to continue raising interest rates at least into 2023. Economists consulted by the Financial Times are not so optimistic: the recession could be deeper than the ECB and the European Commission estimate. Moreover, rising interest rates could make this recession worse, says Marcello Messori, an economics professor at Luiss University in Rome.
According to the latest Eurostat data on nominal hourly wages, wages in the EU increased by an average of 4.2% in the first half of 2022 compared to 2021. In Italy it stopped at around 3%.