Why inflation is hampering wage negotiations
Lagarde expressed a key concern: inflation is becoming the main issue in wage negotiations. The analysis of Jeffrey Cleveland, Chief Economist of Payden & Rygel
The ECB echoed the Fed's mantra that more work is needed to quickly bring inflation back to target and, as expected, the European central bank raised its three key interest rates by 50 points at today's meeting. base, bringing the main refinancing rate to 3.50%, the marginal lending facility rate to 3.00% and the deposit rate to 2.50%.
The Governing Council also committed to "staying the course of significantly increasing interest rates at a steady pace and keeping them at levels restrictive enough to ensure a timely return of inflation to the medium-term objective of 2%".
Christine Lagarde's comments during the post-meeting press conference expressed a key concern: inflation is becoming the main issue in wage negotiations. While inflation expectations and wage growth remain subdued, the risk is that inflation will become more entrenched if it spends a sustained period well above target, driving wage demands higher.
As with yesterday's Fed, reporters were keen to point out the differences between central bank rhetoric and the bond market rally. A reporter asked: “Market skeptics doubt there will be more rate hikes beyond March. So what do you say?”. Lagarde said the ECB "intends" to raise the rate by 50bp in March, but that would depend on the data. The bond market implies that the ECB will target a deposit rate of 3.25%, down from 3.50% this week. One of Lagarde's main concerns concerns core inflation. “If I look at core inflation,” he said, highlighting the gauge excluding food and energy, “we were at 5% in November [year over year], we went up to 5.2% in December and we are remained at 5.2%”. We agree with Lagarde and are also concerned that inflation has become more prevalent, with rising services prices reaching a new cycle high just last month.
However, for now, the bond market seems to have something else in mind. Our feeling is that many investors believe that disinflation is well underway given the improvements in headline inflation.
However, we believe investors will be disappointed by the tightness of core inflation this year, which could mean higher rates hike than currently expected.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/inflazione-negoziazioni-salariali-lagarde/ on Sun, 05 Feb 2023 06:16:21 +0000.