By Paul Hannon
Eurozone wage growth is set to slow this year, despite the rise in energy prices that has accompanied the conflict in the Middle East, according to figures released Wednesday by the European Central Bank.
A tracker of pay deals negotiated by labor unions and similar groups of workers indicates that wages are set to rise by 2.6% this year, having increased by 3% in 2025. The 2026 figure is unchanged from the March estimate.
ECB officials have highlighted the outcome of wage negotiations as a key indicator of whether the jump in energy prices is set to trigger a lasting rise in inflation above their 2% target.
"At this stage our wage tracker continues to point to wage moderation amid a cooling labor market," said Piero Cipollone, a member of the ECB's executive council, in a speech delivered Wednesday in Milan.
Cipollone said the adoption of AI by businesses could weigh on wage growth, citing a survey that found many workers fear losing their jobs as a result of the new technology.
The ECB last week left its key rate unchanged, but indicated that it might raise borrowing costs at its June meeting if it seems likely that the pickup in inflation since the start of the conflict in late February will prove persistent.
The tracker suggests that there are as yet few clear signs that wage deals will add to inflation this year.
That is in line with what the ECB is being told by business leaders across the eurozone. Summarizing its contacts with representatives of 67 leading non-financial companies operating in the currency area, the ECB Monday said they continued to see a slowdown in wage growth this year.
ECB officials worry that if energy prices remain high, workers will expect the pickup in inflation to be lasting and will be more likely to seek and secure higher pay increases as a result, prompting businesses to raise their prices. If officials see signs of that dynamic taking hold, they are more likely to raise their key interest rate when they next meet in June.
In March, the ECB's economists forecast that a broader measure of wage growth would slow to 3.1% in the final quarter of this year from 3.9% in the last three months of 2025 and remain at that level over the next two years. However, that forecast assumed an early end to the conflict that saw energy prices quickly fall from their peaks.
In an adverse scenario, which saw "acute" disruptions to energy supply ending this quarter, the economists expected wage growth to be 3.7% in the final quarter of 2026 and peak at 4% in the first three months of 2027.
In the "severe" scenario in which supply disruptions lasted until the final three months of this year and there was greater destruction of production capacity, the economists saw wage growth at 4.6% in the final quarter of 2026 but peaking at 5.8% in the second half of 2027.
Cipollone said developments in the Middle East no longer resemble the ECB's baseline scenario, and suggest a rate rise may be needed.
"Overall, the current situation seems to be drifting away from our March baseline projections, which increases the likelihood that we may need to adjust our policy rates," he said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-06-26 0556ET
