Where do we stand regarding the debate on the possible triggering of a wage-price loop in the Eurozone? About six months ago, when the debate first arose, there was some presumption but no tangible evidence that such a loop had been set off. Today, we have first signs that a wage-price loop is underway but in a somewhat normal way and with a limited risk of a problematic spiral.
On the wage side, the trend is, as expected, accelerating. At the end of last year, the rate of increase ranged from 3% year-on-year for the ECB’s negotiated wages indicator to 5% for the new monthly wage tracker developed by the Central Bank of Ireland, via 4% for the Eurostat indicator of compensation per employee. At 5%, this is three times faster than the pace recorded in 2019. So the increase is undeniably strong. Moreover, it is fairly broad-based to most occupational categories. But it remains, for the time being, below inflation and, over the last few months of 2022, the rate of increase has levelled off, or even slowed slightly.
If we consider that there is a wage-price loop as soon as wages react to rising inflation, then yes, such a loop would be engaged in the Eurozone. And the real question would be its strength. However, we should not only consider the first round effects (those of the diffusion of inflation on wages): we should also observe feedback effects, from wages to prices and so on. This is not currently reflected in the data, at least not in a systemic way.
The dynamics of wages and prices do not seem to be caught in an uncontrolled spiral, where the increases in one or the other are self-sustaining. If there is a loop, it is not a vigorous one. And the risk of a future spiral also remains limited. The expected rise in wages should certainly fuel inflation in 2023, the expected disinflation will therefore be slowed but not called into question. The fall in inflation already seems to have begun and should continue over the coming quarters.
With the expected slowdown in economic activity, this should help contain future wage demands. And the beginning of a decline in consumers’ inflation expectations, both one year and three years ahead, is another positive signal. In conclusion, the scenario that seems to take shape for the end of the year is one of a more favorable configuration for the purchasing power of employees, where the increase in wages would again be greater than inflation. Thank you for watching and tune in again next week for a new edition of EcoTVweek.
