A key European Central Bank (ECB) official has stated that a dreaded wage-price spiral has not yet taken hold in the euro area, offering some reassurance amid high inflation.
This statement addresses the market's biggest fear right now: 'second-round effects'. Think of it like this: the initial energy price surge from the war is the 'first round'. The 'second round' happens if this shock leads workers to demand higher wages to cope, and companies then raise prices to cover those higher wage costs. This creates a self-sustaining cycle of inflation that is very difficult to stop, which is why central banks watch for it so closely.
So, what led to this situation? The chain of events is quite clear. First, the conflict in the Middle East caused oil prices to surge above $100 per barrel earlier in the year. This directly pushed the euro area's headline inflation up to 3.0%. Naturally, this put the ECB on high alert, and in its April policy meeting, it explicitly warned about the risks of these second-round effects taking root, especially in the services sector, which is heavily influenced by labor costs.
However, and this is the crucial point, the economic data so far tells a different story. While services inflation remains elevated at 3.0%, the wage data—the key fuel for a spiral—is showing moderation. Negotiated wage growth actually slowed from about 2.95% at the end of 2025 to 2.46% in the first quarter of 2026. This slowdown is the primary evidence supporting the ECB official's 'not yet' assessment. The spiral isn't currently happening.
This leaves the ECB in a delicate balancing act. They cannot declare the problem solved, because as their own recent Financial Stability Review warned, a prolonged energy shock could still trigger these effects down the line. That's why the official was careful not to rule them out entirely. For now, the ECB is sticking to a 'meeting-by-meeting' approach, meaning it won't pre-commit to rate hikes but will react to new data as it comes in. This cautious but vigilant stance is likely to continue until there's clear evidence that either the wage pressures are gone for good or that they are starting to accelerate.
- Second-round effects: A phenomenon where an initial price shock (e.g., energy costs) leads to a self-perpetuating cycle of higher wage demands and subsequent price increases by companies.
- Core Inflation: A measure of inflation that excludes volatile categories like energy and food. It is often seen as a better indicator of underlying inflation trends.
- HICP (Harmonised Index of Consumer Prices): The main measure of inflation used by the ECB to assess price stability across the euro area.