Euro Zone Wage Growth Slows Down Amid Energy Price-Induced Inflation Surge

European Central Bank (ECB) policymakers have received some comfort that inflation remains under control as Euro zone wage growth slowed down in the second quarter. The annual increase in labor costs decreased to 3.1% from 3.3% three months earlier, according to data from Eurostat.

The ECB has been closely watching wage developments to see if the recent energy price-induced inflation surge is fuelling undue pay demands. However, the current data suggests that negotiated wage contracts point to only a modest uptick next year, with an estimated 2.6% to 2.7% growth through the end of the first quarter of 2027 and then a pickup to 2.8%. This is in line with the ECB's projections earlier this month.

The ECB has already raised interest rates twice this year, but it says that only moderate policy tightening is required as the current inflation shock is far milder than in 2022 when price growth surged past 10%.