2024-02-14 08:47:42
One of the greatest dangers that jeopardizes compliance with the inflation objective of the European Central Bank (ECB) is the evolution of salaries in the Old Continent.
The possibility of an inflationary spiral being formed due to wage increases, as workers negotiate better conditions to combat the increase in the cost of living, is something that the ECB wants to avoid at all costs. In order to monitor the evolution of salaries more closely, the organization has developed a new leading wage indicator with which they will be able to measure the pulse of the salary negotiations that are taking place. The first reading of the new salary index is not encouraging: it indicates that the ceiling in salary increases has not yet been reached, something that could generate inflationary spikes and delay the moment in which the organization will begin to lower interest rates in the eurozone.
The latest effort to moderate inflation, from the current around 3% to the 2% at which the ECB’s objective is maintained, is the most complicated to achieve. Many analysts, such as Hussain Mehdi, head of asset allocation at HSBC AM, warn of this possibility: “2023 was very good at reducing inflation, but that was the easy part of the process. The last step is the most difficult to go down, and the market is assuming a lot of good news,” he explained to elEconomista in an interview at the end of January.
The economy runs the risk, as has already happened in the past in other geographies, that the increase in prices generates wage increases, and these, in turn, trigger prices even more, fueling new wage increases, and thus, successively, a situation of whiting that bites its tail from which it is very difficult to get out once it starts.
Monitoring the progress of salaries is now of capital importance for the ECB, and hence the need to have the most appropriate indicators to be able to study the situation quickly. “The new wage indicators for the euro zone are based on a new database of negotiations and agreements on wages,” explains the organization. “It highlights how these innovative indicators closely follow wage negotiations, and offer reliable signals of how wages are developing,” says the central bank.
The problem for the ECB is that, according to this new indicator, everything indicates that the wage increase is not going to slow down in the short term. If workers’ payrolls closed the year with a growth of around 3.8% year-on-year, the ECB index indicates that it will continue to increase in the coming months, even exceeding 5%. This poses a threat to the agency being able to rein in inflationary growth in the coming months. As the ECB itself explains, “the collective bargaining agreements that have been seen at the end of 2023 do not show a clear indication that there will be a turning point in salary negotiationsand the long average duration of contracts in some countries could generate persistence in the strong wage growth that is taking place,” explains the ECB.
The market is buying now that the ECB will cut rates by 25 basis points in April, but the official message from the body suggests that the movement will come later, since they are in no hurry in this regard, and prefer to make sure that the situation is well channeled rather than risk making a monetary policy error.
The last official interest rate meeting left this message from the organization, and subsequently several members of the Governing Council have sent messages calling for caution. Martins Kazaks, for example, has highlighted that “The ECB’s worst mistake would be to cut rates too soon”and remember that “the past indicates that, if one begins to relax prematurely, inflation returns, and in the end forces you to have to raise rates much more.”
Source: El Economista Magazine