February 8, 2023

The head of the economic department of the European Central Bank said on Friday that wage increases will continue to fuel inflation in the eurozone even after the effects of the Covid-19 epidemic and the Russian invasion of Ukraine are over. .

Philip Lane wrote in a blog posted on the European Central Bank’s website that “even after the energy and pandemic factors that are causing the inflationary trend dissipate”, wage increases will be the main driver of price increases in the coming years.

As inflation passed the 10% threshold during a slowdown in the region, the European Central Bank is wary of entering a spiral of interlocking wage and price changes that could fall short of its expectations of inflation gradually returning to its 2% target.

However, Lane stressed that the phenomenon is not currently in the process of being tested, as recent negotiations have generally resulted in wage increases averaging 3.8% by 2022 and 3.5% by 2023.

In Germany, about four million workers in the industrial sector, in electronics and mining, received an 8.5 percent pay raise in two years on Friday.

Of course, these increases are considered “above normal”, but they reflect “largely a compensatory mechanism following the decline in real wages recorded since mid-2021” when rising energy and commodity prices led to a sharp rise in global inflation and a decline in purchasing power.

Lane believed that prices would continue to rise in the future, but this should not be interpreted as a “permanent change in base wage dynamics”.

He concluded that after passing the stage of compensating for the decline in wages, “base wages can be expected to rise at a rate equal to the sum of labor productivity growth and the target inflation rate of 2%.”

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