Lower interest rates: will wages play spoilsport?

Lower interest rates: will wages play spoilsport?
Lower interest rates: will wages play spoilsport?

The ECB closely monitors wage growth as it keeps service prices high. Services inflation – a key component of the consumption basket, accounting for more than 40% – increased sharply in 2022. As labor costs weigh heavily in the overall cost structure of the services sector, they are partly responsible for the high and stubborn inflation observed there. Other elements also play a role, such as the delayed response to general cost increases. In Belgium, for example, the prices of certain services are automatically indexed (rent, insurance contracts, etc.). Despite a historically high level, the peak of inflation in the services sector has passed.

Wage growth has been exceptionally strong in the eurozone since 2023. It averaged 4.6% that year and climbed further in the first quarter of 2024 to 5%. Workers are demanding compensation for the sharp price increases they have had to face. Tensions in the labor market, with companies struggling to find workers, helped them win their case. In the eurozone, wage increases are largely the result of negotiations, a process that takes time. Salary agreements are concluded there for a period of two years on average. As a result, new wage negotiations may take place in certain sectors long after an inflation peak. This is why the ECB was not too worried about seeing the rise in wages continue in 2024, considering such fluctuations as “normal” given the wage formation process.

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