Wage growth in euro zone sounds warning on inflation for ECB

Negotiated pay increased 4.7 per cent from a year ago in the first quarter, the central bank said

A key gauge of euro-area wages failed to slow at the start of 2024 – a warning sign to European Central Bank (ECB) officials counting on a slowdown to maintain the retreat in inflation.

Negotiated pay increased 4.7 per cent from a year ago in the first quarter, the ECB said on Thursday. That is up from 4.5 per cent in the final three months of 2023 and matches a record set in the third quarter of last year. Most economists had anticipated a drop or a stable reading.

Indications of sustained upward pressure emerged on Wednesday as the Bundesbank said pay in Europe’s biggest economy shot up by 6.2 per cent between January and March, boosted by tax-free one-off payments to compensate workers for soaring living costs.

The data arrive just two weeks before the ECB is widely expected to begin lowering interest rates for the first time since a barrage of hikes to contain runaway inflation.


While consumer-price gains have slowed significantly, policymakers say a return to the 2 per cent target hinges on the interplay between wages, corporate profits and productivity.

As the supply shocks of recent years abate, much of the remaining concern centres on service-sector inflation, which is strongly driven by labour costs. In a blog post, ECB economists said the general trend in pay is toward moderation, citing the central bank’s newly created tool to track developments.

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“Negotiated wage growth is expected to remain elevated in 2024, which is in line with the persistence that has been factored into Eurosystem staff forecasts and reflects the multiyear adjustment process for wages,” they wrote.

“However, wage pressures look set to decelerate in 2024. ECB wage-tracker data for the first few months of the year, when most agreements take place, indicate that negotiated wage pressures are moderating.”

One challenge for officials assessing pay trends is that salaries are hammered out in different ways across the 20-nation currency bloc. While Germany’s current numbers are swollen by the implementation of deals struck in the past, growth has already started slowing in some of the region’s other large economies.

Several officials have sounded confident that, overall, the data are headed in the right direction. Even Bundesbank president Joachim Nagel has said he expects wage growth to “moderate as inflation continues to recede”.

More evidence on workers’ pay will be revealed a day after next month’s decision, when Eurostat publishes compensation per employee – a metric ECB chief economist Philip Lane has called the most comprehensive indicator of wage pressures.

In March, the central bank forecast that growth in that gauge will average 4.5 per cent this year and slow to 3 per cent in 2026. That is a level it deems broadly in line with its inflation goal.

Even so, the combination of firmer economic expansion and stronger salary gains means the ECB’s room to reduce rates beyond June is “clearly limited”, according to ING’s global head of macro research Carsten Brzeski.

“There is an increasing risk of inflation being sticky and rather staying with the 2 per cent-3 per cent range, instead of settling down at around 2 per cent,” he said. – Bloomberg