Hot Wage Growth Bedevils Wishlist for ECB Rate Cuts

Wages jumped by 5.3% in the Euro Area, matching the prior record. The ECB pointed at wage growth as a risk to its inflation outlook.

By Wolf Richter for WOLF STREET.

IG Metall, Germany’s largest labor union representing workers in the auto, metal, and electric parts industries, announced today it is seeking wage increases of 7% for a period of 12 months for its 3.9 million members, when it begins negotiating with the companies whose workers it represents. The wage increases are to make up for the effects of inflation that household have had to endure. And this is now a broad trend: to make up for the effects of inflation in 2022 and 2023, wages need to be raised. And by a lot.

And so, just out today: In the 20-country Euro Area, wages and salaries jumped by 5.3% year-over-year in Q1, matching the record of Q4 2022, according to Eurostat today. And this wage growth came even as economic growth has been just a hair above zero for a year-and-a-half, except in Q4 when it dipped below zero.

In Germany, where economic growth has been near-zero for two years, wages and salaries jumped by 6.3% year-over-year, in the Netherlands, by 7.6%, in Austria by 9.8%, in Greece by 7.9%, in Portugal by 6.3%, in Spain by 4.5%. On the low side were France (+2.6%) and Italy (+3.3%).

This data came out 11 days after the ECB cut its policy rates by 25 basis points on June 6. Lots of observers, used to seeing 0% and negative ECB rates, had hoped that this rate cut would unleash a long series of rate cuts.

But wage increases figured in the “upside risks” to the ECB’s inflation outlook and have been on the public worry list of the ECB for a while. The rate-cut announcement came decorated with a lot of hawkish comments, such as “domestic price pressures remain strong as wage growth is elevated.”

The ECB has its own measure of wage increases, based on collective bargaining agreements after they were negotiated between employers and organizations that represent workers. These are wage increases that are going to be implemented soon, so a forward-looking measure. Negotiated wages cover about two-thirds of the Euro Area economy. These “negotiated wages” exclude bonuses, overtime, and other individual compensation that is not linked to collective bargaining.

In Q1, “negotiated wages” jumped by 4.7% year-over-year, matching the Euro Area record of Q3 2023:

Big increases of wages and salaries are great for households; they have more spending money, and they feel better, and so they spend more, creating more demand and more jobs, and more economic growth, and that’s great.

Big wage increases also add to the fuel that keeps inflation going, through higher demand for goods and services, and through higher labor costs for enterprises to provide these goods and services.

Inflation dropped sharply in the Euro Area, with core CPI hitting 2.7% year-over-year in April. But in May, core CPI re-accelerated to 2.9%. The ECB’s inflation target is 2%.

The wage increases are sorely needed to allow workers to catch up with their purchasing power after the inflation spike in 2022 and 2023. At the same time, wage increases are one of the factors that fuel inflation further after it has taken off, which is why inflation is so hard to get rid of.

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  41 comments for “Hot Wage Growth Bedevils Wishlist for ECB Rate Cuts

  1. sufferinsucatash says:

    Europeans getting paid yo!

    • Home toad says:

      The leprechauns are getting pissed off, their pot of gold is worthless with inflation. The three pigs are doing good, having secured their houses and paid off the mortgage. Even with her 5% raise, goldilocks can’t pay her rent and is now living with the three bears.

  2. BP says:

    Uh-oh! Wage growth. The inflation that is taken most seriously by those pulling the levers.

    • Desert Dweller says:

      Spot on. Heavy asset inflation for assets owned by the 1%, no problem. However, if those pesky proles get an extra cent, hyperinflation will soon crash the economy.

  3. JeffD says:

    How about EU shelter costs? Anywhere near as crazy as the USA?

    • ru82 says:

      The places like Germany, France, Belgium, England….more expensive housing costs than in the US. But then again so is their minimum wages.

    • George B says:

      Yes, crazy.
      In the lowest income country of the EU (BG), real estate prices/values have jumped by 150%+ since pre-pandemic.
      Avg price per sq ft in Sofia is approaching 250$. New construction approaches 300$/sq ft.. Rent of an average one bedroom appt is ~ 650-700$ / mos.
      Current rates on mortgages (typical is a 5yr ARM / no fixed rate ones are offered) is a tad below 3% APR.
      Keep in mind average after-tax income is 18-20K per year.

      • The Real Tony says:

        Toronto, Canada new builds reach $1,500 a square foot and that’s after prices have fallen somewhat for 1,000 square foot new condos listed at the reduced price of 1.5 million.

      • Kane Watson says:

        Yes you are right
        Hot wage growth is complicating the European Central Bank’s (ECB) plans for rate cuts. Despite economic indicators suggesting a potential need for monetary easing, rising wages are creating inflationary pressures, making rate cuts risky. This wage growth acts as a double-edged sword: while beneficial for workers, it poses a challenge for policymakers aiming to balance economic stability. The ECB must tread carefully to avoid exacerbating inflation. As a form of economic insurance, maintaining cautious rate policies could ensure long-term stability amid fluctuating wage trends.

  4. Ryan Merritt says:

    Good news everyone,

    Chuck E Cheeses is giving you 4.7% more tokens per hour.

    Dave and Busters wageslaves will also be getting 5.2% more tickets per hour.

    Life is great on the plantation !

    • Desert Dweller says:

      Good news comrades, your chocolate ration has been increased by 20%! How can that be since the chocolate bar weights 15% less? Straight out of 1984.

  5. Wisoot says:

    Rate cut was too early – should have waited until Feb Mar 2025. Instability breeds instability.

    • Julian says:

      I guess the reduction came because of the EU elections.
      I’d be happy to see interest rates rise again when they see inflation creeping up again

      • HowNow says:

        Yes. Interest rate changes are politicized. Can’t blame them, really. It’s the stupid citizens who are quick on the trigger to attack politicians when the economy sours. No understanding of business cycles; just revenge for economic downturns.
        Best example: George H Bush, highest approval rating at 92% right after the Gulf War; out of office when we had a small recession in ’90-’91.

  6. CRV says:

    In this case wage increases follow price inflation and therefore can’t cause more price inflation as long as the wage increases are lower than the price inflation. And they are. The thing is that it makes the price inflations stick. And Central banks don’t mind that. They fear deflation more, because deflation makes old debt more expensive.

    • Wisoot says:

      Follow in Vodafone’s footsteps and pay down some of their 42bill debt – might help. The thirst for growth needs to slow e.g. the thirst for lithium downing Idaho farmers tools with potential catastrophic decimation of society dependent on agro and water supply. Lithium is thirsty work. Water for innovation over day to day food. Where have the leaders gone.

    • The Real Tony says:

      Wages always lags the inflation rate so we know the real inflation rate is at least double what they tell the public. In all of history in an inflationary period wages always lag the inflation rate which leads to a wage price spiral as wages try to catch up to the inflation rate.

  7. TulipMania says:


    Are we likely looking at stagflation plus higher government social spending (an attempt to increase growth plus inflation that could spiral out of control)?

    If we have another supply shock, does this look like that 70s show?

    • Kent says:

      The ’70’s was a different time. Stagflation was due to a couple of things: rapidly rising oil prices and labor unions. Oil was still heavily used to produce electricity and vehicles were far less efficient so the high prices were a significant drag on economic growth while causing inflation. Labor union contracts all had COLAs and labor wages in industry were growing rapidly adding even more to inflation. Corporate profits were being crushed by both. Today’s inflation, IMHO, is the lasting impact of the COVID supply disruptions. People gained an expectation that prices were going up and the media made them feel it is going up indefinitely. So corporations keep raising prices and folks keep paying them. Today, corporate profits are through the roof. Completely opposite of the ’70’s.

      • WB says:

        You forgot to mention the other BIG factor that is NOT like the 70’s…

        …DEBT. Also “through the roof”.

        Yeah, go ahead, raise those rates!!!! I triple dog dare you Jerome! This is definitely NOT the 70’s or 80’s where the U.S. could handle double digit interest rates. Unfortunately, our global trade partners may force the issue.

        • ru82 says:

          exactly. Debt through the roof. It was thought the roof in the 70s too?

          Sure, a lot of 1970s inflation was based a lot on Oil prices. OPEC was raising prices and limiting supply and this effected almost everything. Also in the 1970s, we went off the gold standard and the Government started printing a lot of debt. From 1970 to 1980, Gov debt rose from 398 billion to 863 billion. More than doubled for an increased of 116%.

          At the beginning of 2020, the government debt was 23 trillion. To set the same pace as 1970s, we would need to be at 46 trillion by 2030 and we are on a pace to hit 46 trillion. So very similar debt increase to the 1970s. It could happen but I no expert but we are very close to the same pace of the 1970s government debt binge. House prices rose a lot during this time too.

        • WB says:


          I think you misunderstand. Higher interest rates could be tolerated in the 70’s because the DEBT:GDP was low. America still made stuff and exported it.

          That is not the case now. BIG difference/problem.

        • Excellent points, WB. This is definitely not the same situation as the 70s. Overall federal debt was 100 times smaller. Budget deficit was far smaller. 1969 U.S. actually ran a budget surplus. In 2023, U.S. ran a budget deficit of $2.7 trillion. U.S. ran a trade surplus in 1975. Today the U.S. has a trade deficit of 773 billion. The current financial situation in the United States is unsustainable. There is no path out of this doom loop. Very scary times.

    • DeepDarkTruthfulMirror says:

      I’d welcome Wolf’s thoughts, but in the meantime, Lance Roberts makes a rather compelling case that inflation is highly correlated to GDP. GDP is much lower than in the 1970s. The long-term trend is declining, and suggests we won’t see much more than 2% on a consistent basis going forward.

      He released a Youtube video yesterday addressing exactly this, I think his channel is called “Real Investing Advice.”

      I refuse to consider the possibility that AI will change the long-term trend of US GDP on the grounds that I’m tired of hearing about it.

    • B2321 says:

      It’s the same situation as the 70s and 1929, same thing repeating over time. When the economy reaches it’s short term supply constraints, and the wealth gap has been widen to the point that the majority of the society is no longer able to support the cost of living without being continuously supported with cheap credit, two options remain available:
      1. The government leaves the economy to run its course and the aggregate demand breaks, the result is economic depression, the unemployment rises to levels not seen before, and huge defaults, 1929 scenario.
      2. The government tries to hide the fact that there is no real growth through huge stimulus (monetary and fiscal stimulus), the result is positive nominal growth rate and high inflation rate, while the real growth is negative, at the end the economy will fall in stagnation. You can run this option as long as the market still belives the official narrative, when the situation becomes evident the result is market crush. After the 70s the situation was resolved because there was an entire continent offering cheap available labor, that’s why the inflation came down during the 80s and the world was able to further fuel the growth for 3 more decades. The issue is that we don’t have that option anymore, all available supply components are being used at the maximum short term capacities, considering our current technological level. So no further productivity growth on short-term, only a few more months and we will experience a unique financial and economic phenomenon, which we haven’t seen for 100 years. The timing is also meaningful.

  8. Thunderdownunder says:

    5% wage growth less high EU taxes = a step down in living standards which have been happening since cheap energy was destroyed.
    they have tried everything from energy subsidies to rent assistance and yet you cannot fix stupid… record high stock markets.
    I think all have been taking crazy pills for a long time

  9. Bev kennedy says:

    The wage increases would be to offset record spikes in cost of living. A helpful data set would be to compare how households have slid behind and by how much and how the wage increases are a way of compensating the evening the recent distortions
    The wage increases are not reflective of households that were managing to keep up and now being given an extra top up
    Of course this also will reflect in increases in cost of services but the reality is these employees have to cover the cost of food and keeping a roof over themselves unless we want to revert to the pre Edwardian era of leveling up so the average worker had a decent living wage rather than facing dire poverty
    Some critical data is missing as to why the wage income increases

    • Wisoot says:

      Personal income tax rates europe 2024 (taken from tax foundation org) vs
      Wage/salaries y-on-y growth (taken from Wolf’s article above)

      Germany – 47.5% vs 6.3% year-over-year
      Netherlands – 49.5% vs by 7.6%
      Austria – 55% vs by 9.8%
      Greece – 44% vs 7.9%
      Portugal – 53% vs 6.3%
      Spain – 54% vs 4.5%
      France – 55.4% vs 2.6%
      Italy – 47.3% vs 3.3%

      In a successful Eurozone, might expect all income tax percentages to be the same? They appear to still want difference and sovereignty. Standardisation of human beings charging along at the rate of knots – why not income tax?
      Thanks Wolf for highlighting wage growth.

      • Hi Wisoot: Europe also charges a Value Added Tax (VAT) which is consumption based and hits everyone the same, except the VAT rate is also different between countries, just like the income tax rate you pointed out.

    • Mitry says:

      It’s probably simpler than that. The economy needs blue collar workers, but blue collar workers don’t want to join the economy. Solution: wage increases. If the EU’s inflation has affected them like it has the US, my guess is 5% is a conservative start of what’s to come.

  10. Brewski says:

    From a friend today: “We are in Europe at the moment and I must say prices are absurd. I really don’t understand how the morons calculate the inflation data! Prices are high and service is not what it used to be. Very busy everywhere! And season is not yet in full swing. Lots of Chinese! Generally, society in Europe is very unhappy with the status quo! Far right is rising and the lefties are shitting themselves! I have no idea how this is all going to end!”

    PS. Similar report here in upstate NY.

    • Prof. Emeritus says:

      Touristy areas were always absurdly priced, especially in peak-season. And given this year Germany hosts the EURO Cup and France the Olympic games it’s expected to be record-shattering year for tourism – they can charge whatever they want. Yet those services aren’t typically consumed by European citizens themselves.

  11. Redundant says:

    The Euro Area is in a catch-22 cycle, just like most of the world, where there’s conflicting narratives married to ambiguous data and policy politics. The realtime knee jerk reactions to every data point exacerbate inaccurate narratives.

    Wage increases are needed because inflation runs hot, which fuels future inflation growth and that extends and perpetuates a doom loop.

    Compounding the wage conundrum, is the addition of wealth effects from bubble mania FOMO and the allure and desperation of getting ahead, before something breaks.

    The dichotomy between wealthy speculators and people wanting a better living wage is obviously an increasingly wide chasm, as most people are struggling to buy groceries — while speculators hope that the magnificent five stocks will continue a parabolic trajectory towards infinity — regardless of actual realistic cash flows.

    It’s interesting to see the contrast in human wage growth narrative versus the more powerful artificial intelligence narrative linked to insane levels of greed.

  12. LordSunbeamTheThird says:

    ECB cuts are nothing to do with wage increases or a lack of wage increases and everything to do the next political appointment of Ursula von der Leyen whether thats European Commission precedent or a second term at the ECB, which is absolutely abetted by the national leaders and those on the gravy train project which is the “eurozone”.

    With wage increases like this, or lets be clear second round effects, the thumb is so heavily down on the scales that France, Italy, Greece, Germany etc are all borrowing with negative real interest rates. How can anybody make a case that borrowing are appropriate? Its simply the case that the Italian and now French government -cannot- pay more.

    The whole things a fiddle. “apres moi le deluge” from all of them.

  13. Prof. Emeritus says:

    IG Metall members mainly work in the automotive industry – they could easily ask even for 10% increase and it wouldn’t translate into inflation as long as car manufacturers lower their profit margins. Problem is no shareholder wants to hear such news. Even less so in the services industry. Sorry for the seemingly anti-capitalist framing, but given real wages in most of the EU are still below pre-COVID levels I have my doubts it’s the wage negotiations causing the price hikes. To some extent of course, but as long as there is demand for absurdly priced European goods and services around the globe (China and US) they are merely exporting their inflation to the old continent.

    • Glen says:

      Definitely don’t apologize for anti capitalist framing! It should be objectively evaluated versus held on some pedestal like it is here in the states. When the goal post is profit it is worth evaluating how it meets the needs of society and the world as a whole. Low priced goods in one location often mean negative impacts to labor in another.

  14. CCCB says:

    I thought you had to get rid of inflation first, before you cut rates.

    • Wolf Richter says:

      Inflation has come down a LOT. Just not all the way to 2%, but to 2.9%, and now it’s ticking up again. The Eurozone economy has been near stagnation for about two years. So the economy has slowed and inflation has come down a lot, and so they think they can cut a little and see what happens.

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