Macro Watch - Wage growth: How far does it need to fall?
News article
19 March 202416:30
The key to disinflation continuing will be a timely normalization in wage growth. We estimate wage growth needs to fall to ranges of 2.7-3.0% for the eurozone, 2.2-2.8% for the Netherlands, and 3.3-4.0% for the US in order for to inflation to fall to – and stay at – 2%. But central banks will likely cut rates before wages fall this far – otherwise they could be too late. This is due to the lags with which monetary policy affects the economy.
Wage growth is driven by future inflation expectations, labour market tightness, and the catch-up of nominal wages and the price level. We take stock of developments in these channels
Wage growth in the eurozone still has a significant way to fall, and Q1 data will prove key
Businesses likely have space to accommodate some further increases in wages, meaning wage growth does not immediately have to fall back to target-consistent levels
We include an Appendix in which we explain the various measures of wage growth
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