ECB not seeing any big wage response to surging inflation

[GENEVA, Switzerland] The European Central Bank is not seeing significant wage pressures in response to this year’s energy-driven inflation surge, the bank’s chief economist said on Wednesday (Sep 23), downplaying concerns that rapid price growth was at risk of getting embedded.

Inflation shot past 3 per cent last month and some economists see it hitting 4 per cent by the end of the year as fuel and gas prices have shot up in recent weeks on escalating tensions in Iran.

“We’re not seeing any big response to the energy shock, and how I reconcile that is (that) people know the cost of living is going up more than they expected,” Philip Lane told a university lecture.

“But they’ve also got a lot of firms that say, ‘Look, we’re being outcompeted by China; you do know if you ask for too much, we have the AI robots ready to go’,” he added.

The surge in energy prices pushed up market bets for ECB rate hikes and investors now see another three or four moves on top of the ECB‘s hikes in June and September.

But once the risk premium is stripped from market data, the interest rate peak is seen at just above 3 per cent next year, then falling by the end of 2027, suggesting that only two further hikes are actually priced in, Lane said.

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Still, Lane acknowledged that energy prices are now seen tracking the ECB‘s adverse scenario through the middle of next year and only coming back to the baseline thereafter, creating a potential risk.

Lane also noted that low natural gas stocks were a risk.

Energy firms delayed stocking up on gas over the summer and storage levels, at 70 per cent, are 16 percentage points below their historic average. REUTERS