Wages, inflation and the role of the ECB

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Employment and Social Affairs 4 June 2023 , by Newsletter European

Estimated time of reading: ~ 1 minutes

During the speeches for the celebrations for the 25th anniversary of the European Central Bank, officials from the EU and the President of the ECB, Christine Lagarde, highlighted the prosperity and stability that the Frankfurt-based institutions gave to the European countries. This is especially true in the light of the various crises that spanned from 1998 to these days, when the ECB successfully maintained a balance between its policy goals and the needs of EU citizens. On its webpage, the ECB underlines its work supporting the economy and employment. “We use a range of monetary policy tools to keep prices stable. This, in turn, supports the economy, people’s incomes, and job creation. Our tools include setting key interest rates for the economy, lending to banks to support the flow of credit to households and businesses, and buying assets to help funding conditions in all parts of the economy”, the ECB states.

The economic crisis created by the Russian invasion of Ukraine created new issues for the ECB. Taking employment and social affairs into account, wage developments is certainly one of the main problems that the ECB has to consider in its activities, in particular during this time of rising inflation. The ECB fears that accelerating wages, coupled with a tight labor market, could raise a wage-price spiral, as wages are considered a source of upside risk. As Fabio Panetta, Member of the Executive Board of the ECB, stated during a public event in February 2023, “All in all, higher wage increases do not necessarily signal a persistent divergence from our 2% inflation target. But we cannot rule out that stronger and sustained wage dynamics will take hold if above-target inflation proves to be persistent”. The ECB will continuously monitor the situation related to wage growth and its consequences on the inflation dynamic.

Written by: Francesco Marino