ECB survey shows wage growth cooling to 2.5% despite inflation pickup

Eurozone businesses expect wage increases to slow this year even as energy-driven inflation pushes above the ECB's 2% target.

The European Central Bank said only 20% of businesses expect workers to demand higher pay in response to the pickup in inflation, suggesting the energy price shock from the U.S.-Iran conflict has not broadened into a wage-price spiral.

"Most contacts did not anticipate any notable impact on wage growth, citing the subdued economic conditions and employment outlook," the ECB said in its survey of 79 leading eurozone businesses conducted between June 22 and July 1.

The businesses expect the pace of wage increases to slow to 2.5% this year from 3.1% in 2025, and to ease further to 2.4% in 2027. A separate survey of 19,000 adults conducted between June 4 and 29 found households expect consumer prices to rise 3% over the next 12 months, down from 3.5% in May. Eurozone inflation stood at 2.8% in June, up from 1.9% in February, driven largely by higher oil and natural gas prices after the Strait of Hormuz closure.

The data supports ECB President Christine Lagarde's view that second-round effects have yet to materialize, reducing the urgency for aggressive rate hikes even as headline inflation overshoots the 2% target. The ECB left its key rate at 2.25% in July, though investors still expect a rate increase as early as September.

The survey findings contrast with the inflation trajectory. Eurozone's annual inflation rate accelerated to 2.8% in June from 1.9% in February, driven by the surge in energy prices after the conflict between the U.S. and Iran that largely closed the Strait of Hormuz to shipping. Central bankers have been watching for signs that workers would demand compensation for the loss of purchasing power, which could force businesses to raise prices further and entrench above-target inflation.

Only 10% of businesses surveyed said they intended to offer larger pay increases to compensate employees for the jump in prices, the ECB found. In businesses closer to consumers, the pricing environment was more challenging, with little adjustment of prices so far as consumers remained "very price sensitive," the central bank said.

Households Temper Inflation Expectations

The decline in household inflation expectations may further reduce pressure on wages. Households in February had expected prices to rise 2.5% over the coming 12 months — a figure that rose to 3.5% in May as energy costs spiked, before retreating to 3% in the latest survey. The retreat suggests the inflation shock may be seen as temporary rather than structural.

"Believe me, we are really scrutinizing the emergence of second-round effects, but we are not seeing it," Lagarde told a news conference Thursday after the ECB's rate decision.

The last time eurozone inflation rose above 2.8% on an energy supply shock was in late 2022, when the region was emerging from the Russia-Ukraine energy crisis. In that episode, wage growth lagged inflation for several quarters before catching up, contributing to a prolonged period of above-target inflation that forced the ECB to raise rates to a record 4% in 2023.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.