ECB’s Lagarde highlights wage growth as increasingly important inflation

In a European Parliament committee hearing, ECB President Christine Lagarde highlighted that the “ongoing disinflation process” is expected to continue “gradually further down over 2024,” attributing this trend to the diminishing effects of past upward shocks and the impact of tighter financing conditions on inflation.

Lagarde noted a “gradual decline” in core inflation, which excludes energy and food prices, while also pointing out the “signs of persistence” in services inflation.

Significantly, Lagarde identified wage growth as a crucial factor, stating it is becoming an “increasingly important driver of inflation dynamics.” ECB’s wage tracker signals sustained wage pressures, although there’s “some levelling off” observed in the latest quarter of 2023. The direction of wage pressures in 2024 largely depends on “ongoing or upcoming negotiation rounds” affecting a broad segment of the workforce.

Furthermore, Lagarde observed that the influence of unit profits on domestic price pressures is on the decline, suggesting that wage increments are being partly accommodated through “profit margins.”

Full remarks of ECB Lagarde here.