Macro Watch - Wage growth: How far does it need to fall?

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  • Economy

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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