Hot wage growth spoils wish list for ECB interest rate cuts

Hot wage growth spoils wish list for ECB interest rate cuts

Eurozone wages rose 5.3%, matching the previous record. The ECB pointed to wage growth as a risk to its inflation outlook.

By Wolf Richter for WOLF STREET.

IG Metall, Germany’s largest union representing workers in the automotive, metal and electrical parts industries, today announced it is seeking pay increases of 7% for a period of 12 months for its 3.9 million members. employees she represents. Wage increases should compensate for the consequences of inflation that households have had to endure. And this is now a broad trend: to offset the effects of inflation in 2022 and 2023, wages must be increased. And with a lot.

And so today: in the 20-country eurozone, wages and salaries rose by 5.3% year on year in the first quarter, matching the record of the fourth quarter of 2022, Eurostat said today. And this wage growth even came at a time when economic growth had been just a hair above zero for a year and a half, except for the fourth quarter, when it fell below zero.

In Germany, where economic growth has been close to zero for two years, wages rose by 6.3% on an annual basis, in the Netherlands by 7.6%, in Austria by 9.8%, in Greece by 7.9%, in Portugal with 6.3%, Spain with 4.5%. On the low side were France (+2.6%) and Italy (+3.3%).

Hot wage growth spoils wish list for ECB interest rate cuts

These data came eleven days after the ECB cut its policy rate by 25 basis points on June 6. Many observers, used to seeing 0% and negative ECB interest rates, had hoped that this rate cut would trigger a long series of rate cuts.

But wage increases have been part of the “upside risks” to the ECB’s inflation outlook and have been on the ECB’s public concern list for some time. The interest rate cut announcement was accompanied by many hawkish comments, such as “domestic price pressures remain strong as wage growth is high.”

The ECB applies its own benchmark for wage increases, based on collective bargaining agreements negotiated between employers and organizations representing employees. These are wage increases that will be implemented soon, so they are a forward-looking measure. Negotiated wages cover about two-thirds of the eurozone economy. These ‘negotiated wages’ exclude bonuses, overtime and other individual compensation that is not linked to collective bargaining.

In the first quarter, “negotiated wages” increased by 4.7% year-on-year, matching the eurozone record from the third quarter of 2023:

Big pay increases are great for households; they have more spending money, and they feel better, and so they spend more, which creates more demand and more jobs, and more economic growth, and that’s great.

Large wage increases also contribute to the fuel that keeps inflation going, through greater demand for goods and services, and through higher labor costs for companies to provide those goods and services.

Eurozone inflation fell sharply, with the core CPI reaching 2.7% annualized in April. But in May, the core CPI accelerated again to 2.9%. The ECB’s inflation target is 2%.

The wage increases are desperately needed to enable workers to catch up on their purchasing power after the inflation peak in 2022 and 2023. At the same time, wage increases are one of the factors that further fuel inflation after it has developed. inflation is so difficult to eliminate.

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