Lagarde warns the ECB against allowing rapid wage growth to fuel inflation

There is a rapid increase in wages in the Euro zone. The European Central Bank should take steps to prevent this from adding to already high inflation, according to ECB President Christine Lagarde. The ECB has raised interest rates by a total of 2.5 percentage points since July in an effort to arrest a historic surge in inflation. As long term price growth expectations have started moving above its 2% target, more policy tightening is expected over the next several meetings.

Lagarde warns the ECB against allowing rapid wage growth to fuel inflationThe Croatian newspaper Jutarnji list quoted Lagarde as saying on Saturday that wages are increasing at a faster pace than expected. It is essential that inflationary expectations are not deanchored, nor that wages have an inflationary effect. According to Reuters, Lagarde did not give any new policy hints in the interview, but said the bank must “take the necessary measures” to bring inflation down to 2% from its current level of near 10%.

As the 20th member of the euro zone on Jan. 1, Croatia will join the currency bloc at a time of unusual turmoil. This is because the ECB is attempting to tame inflation after unleashing unprecedented stimulus to stimulate price growth when it was exceptionally low for the past decade. “It is essential that domestic causes, which are mainly related to fiscal policy and wage dynamics, do not lead to inflation becoming entrenched,” Lagarde added. If there are no additional shocks, Lagarde predicts the bloc’s winter recession, caused by soaring energy costs, will be short and shallow.