Euro zone wage growth slows, only modest uptick seen

Euro Zone Wage Growth Slows; ECB Expects Only Modest Rise Ahead

Overview of Wage Growth and ECB Policy Response

Recent Trends in Euro Zone Wage Growth

FRANKFURT, Sept 16 (Reuters) - Euro zone wage growth continued to slow last quarter even as inflation picked up, and negotiated wage contracts point to only a mild pickup next year, offering European Central Bank policymakers comfort that price growth remains under control.

ECB Monitoring and Concerns

The ECB is keenly watching wage developments to see if the recent energy price-induced inflation surge is fuelling undue pay demands, as this could set off a hard-to-break wage-price spiral that would require more aggressive policy tightening.

Interest Rate Actions and Inflation Context

The ECB has already raised interest rates twice this year, but it says that only moderate policy tightening is required as the current inflation shock is far milder than in 2022, when price growth surged past 10% and the ECB was late to react.

Labour Cost Data and Wage Projections

The annual increase in labour costs slowed to 3.1% in the second quarter from 3.3% three months earlier after having risen above 5% at the height of the 2022/23 inflation crisis, data from Eurostat showed on Wednesday.

Separate figures from the ECB meanwhile point to only a modest uptick in negotiated pay growth in the first half of 2027 after broadly steady increases for the rest of this year.

ECB Wage Growth Indicators

The ECB's headline indicator suggests negotiated wage growth of 2.6% to 2.7% through the end of the first quarter of next year, then a pickup to 2.8%, the bank said.

Implications for Inflation Target and Labour Market

The ECB has long said that wage growth of 3% is broadly consistent with its 2% inflation target and its projections earlier this month continue to point to only modest pay pressures given some softness in the labour market.

Risks and Surprises in Wage Data

The ECB's key worry is that high energy costs will eventually push up the cost of other goods and services, and labour unions will respond by demanding compensation for this increase.

However, none of this appears to be showing in data for now, leaving some policymakers surprised.

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)