When the European Central Bank continues to be anxious in regards to the price-wage loop | EUROtoday

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European Central Bank President Christine Lagarde in Frankfurt, Germany, January 25, 2024.

This is the type of data that makes the leaders of the European Central Bank (ECB) tremble. On Monday February 5, a union on the German airline Lufthansa known as a strike, demanding a 12.5% ​​wage improve. Two weeks earlier, Deutsche Bahn railway employees had blocked a part of the nation, rejecting a suggestion of a 13% improve. As for sector negotiations, German unions have made their calls for recognized: +15% wages in development, +12% in printing works, +8.5% for non permanent jobs.

These showdowns on pay slips, that are discovered all through Europe, are monitored like milk on hearth by the ECB. Seen from a Central Bank whose mandate is to regulate the rise in costs, such a motion might trigger the worst situation, with a threat of an inflationary spiral: workers, whose buying energy has fallen, demand will increase, which pushes firms to boost their costs, so as to preserve their income, which additional fuels inflation…

“For the moment, wages are growing at a level well above that of long-term equilibrium”, warned Philip Lane, the chief economist of the ECB, on January 13. In the third quarter of 2023, they elevated by 4.7% within the euro zone, whereas “compensation per employee” (a barely completely different measure) elevated by 5.3%. That is to say wage will increase of round 5%, their highest degree for the reason that creation of the only foreign money. This is above the extent of inflation (at the moment at 2.8%), which corresponds to the start of catching up on the buying energy misplaced over the previous two years.

Ambivalent message

During her final press convention, on January 25, Christine Lagarde, the president of the ECB, in flip warned that “the high level of salary increases (…) maintained strong pressure on prices ». But she added two elements: first, this pressure “started to shrink”. Then she “can’t see at the moment” the well-known price-wage spiral: this can be a threat, however one which has not materialized till now.

One of the reasons for this ambivalent message is the delay with which salaries are recognized. Typically, compensation is negotiated every year, and, in some international locations comparable to Germany, agreements typically cowl two years. And even as soon as department agreements have been signed, the statistics are usually not out there for a lot of months. This makes the ECB's job tough: it should resolve on a potential change in rates of interest with out actually understanding the fact of wage developments.

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