ECB sees further signs of easing wage pressures Reuters

FRANKFURT (Reuters) – Wage pressures are easing in the euro zone, driven largely by lower additional compensation paid on top of negotiated wages, likely contributing to further moderation in inflation, a European Central Bank study said on Wednesday.

Wage growth has been rapid for years, driven significantly by so-called “wage drift,” or actual payments made to employees in excess of negotiated wages.

Wages have been driven by bonuses, inflation-adjusted payments and longer working hours, but the latest data shows a narrowing of the gap between negotiated and actual pay, a likely sign that inflationary pressures will ease as predicted for a long time ECB.

“We are now at a point in the disinflation process where the upward pressure from wage drift is diminishing,” the ECB said in an Economic Bulletin article. “The recent moderation in growth in compensation per employee has been driven by a reduction in wage drift.”

Instead, a negotiated wage increase will once again become the leading indicator for the ECB, but even there, signs of moderation are increasingly evident.

Growth in negotiated wages slowed to 3.5 percent in the second quarter from 4.8 percent three months earlier, hitting the lowest level since late 2022.

While that is still faster than the 3% seen in line with the ECB’s 2% inflation target, the central bank hopes a further slowdown will let price growth fall back to its target in late 2025.

However, Germany, the eurozone’s biggest economy, expects big wage increases until 2025, raising some doubts about the ECB’s outlook.

“As inflation compensation is increasingly integrated into collective wage negotiations, the high growth in negotiated wages has supported current levels of growth in compensation per employee,” the ECB said.

“As the rise in inflation has passed, there may be some residual recovery in real wages, but the upward pressure on negotiated wage growth is likely to diminish,” the ECB added.