ECB not seeing any big wage response to surging inflation

The European Central Bank (ECB) has reported that it is not observing significant wage increases in response to the recent surge in energy-driven inflation, according to the bank's chief economist, Philip Lane. Inflation has surpassed the 3% mark and is expected to reach 4% by the end of the year, primarily due to escalating fuel and gas prices caused by tensions in Iran.

Lane explained to a university lecture that despite the increase in living costs, people are aware that the situation is worse than they anticipated, but they are also facing competition from firms in China. These firms are investing in artificial intelligence (AI) robots, indicating they are not likely to accommodate excessive wage demands.

The surge in energy prices has led to expectations of another three to four rate hikes from the ECB, following the hikes in June and September. However, once the risk premium is removed from market data, the peak interest rate is projected to be just above 3% next year, with a reduction by the end of 2027. This suggests that only two more rate hikes are currently priced in, with Lane noting that market data indicates the ECB's rate hike scenario is more severe than anticipated.

Lane also acknowledged that energy prices are now expected to track the ECB's adverse scenario throughout the middle of next year before returning to baseline levels, creating a potential risk. Additionally, low natural gas stocks pose a risk, as energy firms delayed stocking up on gas during the summer. Storage levels were at 70% at the time, which is 16 percentage points below their historical average.