High energy prices, a consequence of the conflict in the Middle East, pose a significant challenge for the European economy as they directly and indirectly raise inflation. Estimates suggest that more expensive energy increases the risk of secondary effects through wage growth and broader price setting, with energy shocks affecting all parts of society.
Despite these pressures, European Central Bank (ECB) Executive Board member and Governor of the Bank of Finland Olli Rehn stated on Wednesday that there are currently no signs of secondary effects on wages. Rehn made his comments while participating in the OMFIF Nordic SSA Forum in Helsinki, where he emphasised that current wage growth in the eurozone is moderate.
Forecasts for future wage growth have also been assessed as moderate, suggesting that structural inflationary pressures have not yet become entrenched in the income distribution system. The ECB is carefully assessing how restrictive monetary policy will affect economic activity, monitoring every step to avoid excessive slowdown while simultaneously curbing inflation.
The European Central Bank raised interest rates in June and confirmed the existing levels of key interest rates in July. Markets have already begun to factor in a more restrictive monetary policy compared to the period before the outbreak of the conflict, indicating an adjustment in the expectations of investors and businesses.
Although energy shocks remain present, current wage data provide some assurance that high energy prices do not automatically translate into ever-greater demands for higher income. The ECB will continue to monitor the situation, bearing in mind that high energy prices remain the primary source of inflationary pressure in the eurozone.
