A European Central Bank (ECB) survey said wage pressures are easing across the euro area, mainly due to a reduction in extra compensation paid on top of negotiated wages, which is likely to lead to a further easing of inflation.
Wage growth has been rapid over the years, driven primarily by what’s called “wage expansion” — the amount actually paid to employees on top of their negotiated wages.
Wage fluctuations have been driven by bonuses, inflation compensation and increased working hours, but the latest data shows the gap between negotiated and actual payments is narrowing, likely a sign of easing inflationary pressures as the ECB has long predicted.
“We are at a stage in the process of containing inflation where upward pressures on wages are easing,” the ECB said in its economic bulletin.
“The recent slowdown in growth in compensation per employee is due to moderating wage volatility.”
Instead, negotiated wage increases will again be the ECB’s main indicator, but even there signs of easing are increasingly evident.
Negotiated wage growth slowed to 3.5% in April-June from 4.8% three months earlier, the lowest since late 2022.
That’s still faster than the 3% rate that would be in line with the ECB’s 2% inflation target, but the central bank hopes a further slowdown will allow price growth to moderate to its target in the second half of 2025.
But Germany, the euro zone’s largest economy, is forecasting strong wage increases through to 2025, casting doubt on the ECB’s outlook.
The ECB added that the euro area is “enjoying a historically high growth in compensation per employee” but is currently at a stage in the process of containing inflation where “pressures from wage increases are easing.”
“High negotiated wage increases support the current level of increases in remuneration per employee, as inflation compensation is increasingly integrated into collective wage negotiations,” the ECB said.
“With the inflation spike now over, some real wage catch-up may remain, but upward pressure on negotiated wage increases is likely to weaken.”
Earlier this month, the ECB announced it would cut interest rates by another 0.25 percentage points, but ECB President Christine Lagarde remained cautious about when further cuts would come into effect.
Reuters
