Balazs Coranyi

FRANKFURT. (Reuters). Wage growth in Europe may not be visible yet, but underlying pressures and financial crises have made it difficult for the European Central Bank to stem strong income growth that could lead to record-breaking inflation.

Despite record inflation, the ECB has been reducing stimulus with the smallest increments possible. They argue that wages growth is not necessary for sustained inflation so prices will likely moderate after the energy shock.

This argument is becoming increasingly shaky. Analysts and policymakers believe that the ECB cannot wait to receive hard data. They need to prevent and not respond to rising wages.

The conditions for an increase of wages have been established and evidence is available to support this, although government agencies may need more time to compile the information.

Isabel Schnabel (ECB Board Member) stated this week, “The data look backwards and we must pursue a forward looking monetary policy.”

“So we can’t afford to wait until a wage-price spiral has already set in before responding,” she told German newspaper Handelsblatt. We must act.

Although the evidence is not conclusive, it does point to the need for rapid ECB actions.

Amazon France’s French branch rejected a wage hike offer offering 3.5% and demanded that unions demand 5%. Last week, Germany’s IG Metall, a powerful trade union, presented an 8.2% demand for a wage increase to compensate the massive rise in inflation.

Philip Lane, chief economist at the ECB, has maintained that wage growth should be 3% to keep inflation in line with the bank’s 2% target. However, recorded increases are well below 2%.

Greg Fuzesi of JPMorgan (NYSE 🙂 sees wages rising already to 2.3% in their first quarter before wage negotiations are a major event. Even this rate is likely to rise.

UniCredit economist Marco Valli said, in the meantime, that his models show a rise in negotiated wages to more than 4%.

Inflation has seen sharp (OTC:) rises across the Euro area. This makes it an important political issue. Trade unions who were willing to forego big wage demands during the early months of the pandemic now need to recoup their members’ lost purchasing power.

The eurozone labour market has been in the best state in many decades, which is another reason why wages are expected to rise.

The unemployment rate is now at 6.8%, with more drops anticipated. Employment is also at an all-time high of 162,000,000, which is more than ever before.

Anecdotal evidence suggests that some companies already pay inflation compensation in addition to collectively agreed wages. Deutsche Bank (ETR:) said. It is possible that the 3.5% annual increase for effective German wages in our 2022 forecast might prove to be too small.

The underlying inflation, which excludes fuel and food prices, is already almost 4%. Waiting for wage growth could fuel more inflation. In a hard-to-break cycle, this could lead to high prices growing.

Christine Lagarde (ECB chief) has previously warned that if inflation continues to be high it will become a problem in wage negotiations.

The market is sceptical about the ECB’s willingness to limit inflation in the long-term. Longer-term expectations for inflation are 2.5%

While policy tightening won’t lower energy prices, it will signal that the ECB is committed to its 2% target. This will be a signal for firms and unions in their negotiations over pay.

However, policymakers are in agreement with Schnabel, and the ECB should end its bond buying within the next few weeks, then start increasing rates to get back to at least zero by the year’s end. [L8N2WM08Y]

BNP Paribas (OTC) stated that “Like the Fed the ECB has fallen behind and is therefore playing catch-up, even if it is unlikely for the ECB to move as fast or far as the Fed.” “Wage Growth is rapidly gaining momentum.”