ECB’s Lagarde highlights wage dynamics in inflation outlook

In a speech delivered at the European Parliament overnight, ECB President Christine Lagarde emphasized the significant role of wage pressures. According to Lagarde, wage pressures “remain strong” across the region, anticipated to be an “increasingly important driver of inflation dynamics” in the coming quarters.

This shift towards wage-driven inflation comes as the contribution of profits, previously a significant factor in domestic cost pressures, begins to wane. Importantly, Lagarde pointed out that labor cost increases are being “partly buffered by profits”, preventing a full pass-through to consumer prices.

Lagarde also touched on the risks associated with second-round effects, a concern for economies dealing with inflation. She reassured that ECB’s current restrictive monetary policy, combined with a notable decline in headline inflation and well-anchored longer-term inflation expectations, serves as a “safeguard against a sustained wage-price spiral”.

Looking ahead, Lagarde expects continued deceleration in inflation rates as the effects of previous shocks diminish and tighter financing conditions exert downward pressure.

Full speech of ECB’s Lagarde here.