High wage agreements and price increases: ECB warns of inflation drivers

As of: 03/22/2023 4:48 p.m

The ECB is fighting inflation by raising interest rates, but so far with limited success. The central bankers are therefore appealing to companies and employees alike not to fuel inflation any further.

The President of the European Central Bank, Christine Lagarde, warns of large wage increases. At a Frankfurt University conference, Lagarde said the burden of inflation must be shared fairly between companies and workers. The ECB has an index for wage costs in seven euro countries. The usual rate of increase has doubled in recent months. Lagarde said there is a link between rising wages and rising prices.

“Fantastic time” for business

At the same time, the ECB President cited high corporate profits as a price driver. When consumption increased dramatically after the pandemic, many companies would have increased their prices. That was beyond the level that could be justified by rising costs, Lagarde said.

Last year was a “fantastic time” for companies to raise prices, ECB Director Philip Lane confirmed. Corporate profits have risen faster than labor costs. Economist Lane is also critical of the further development of wages. “It’s important that she comes down,” Lane said of the current high rate of increase.

The background is the concern about a wage-price spiral: if wages rise across the board, both the costs for companies and the possibility of charging more for their own products and services rise. Prices are rising, which in turn forces the unions to make new high wage demands.

A shortage of skilled workers is also driving wages

At the Frankfurt conference, both ECB President Lagarde and the Viennese economics professor Monika Merz pointed out that an increasing shortage of labor also leads to rising wages. Merz said that if the number of workers fell, the low-skilled could push through significant wage increases. The collective bargaining agreement at Deutsche Post two weeks ago is well above the progress in productivity. This ultimately leads to job losses.

Despite the current high level of inflation, the ECB’s spokespersons left no doubt about their inflation target of two percent. The ECB will continue its robust strategy. Within a few months, it had raised interest rates by 3.5 percentage points to make money more expensive and thus curb inflation.

In her speech, the President of the ECB said twice that there was no “trade-off” – that is, no contradictory options for action – between combating inflation and stabilizing the banking system. “We have a lot of tools to deliver financial stability,” Lagarde said, referring to current concerns about banks.

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