Euro zone firms finally absorbing wage pressures -ECB’s Lane -September 21, 2023 at 07:35 pm EDT

NEW YORK, Sept 21 (Reuters) – Euro zone companies are
finally absorbing wage pressures and the labor market has
started to soften, European Central Bank chief economist Philip
Lane said on Thursday, suggesting inflation pressures from
employee pay rises are finally subsiding.

The ECB raised its deposit rate to a record high 4% last
week to combat excessive inflation but an exceptionally tight
labor market has kept upward pressure on wages, raising the
upside risk on consumer prices.

While far from declaring victory over inflation, Lane argued
there were tentative signs that wage pressures may be softening,
potentially easing fears of some conservative policymakers who
are keeping further rate hikes on the table.

“The contribution of unit profits to annual inflation in the
first half of 2023 has moderated relative to its contribution in
2022, suggesting that the rising wage pressures are starting to
be absorbed by firms,” Lane said in a speech in New York.

“Price hikes coming in below the increase in unit labor
costs are projected to contribute further to the required
disinflation during 2024,” he told the Money Marketeers of New
York University.

While jobless rates are holding at record lows, a paradox
for some given surging borrowing costs and a stagnant economy,
Lane said a change may be underway.

“The labor market has so far remained resilient despite the
slowing economy but shows signs of losing momentum,” he said.

Although Lane repeated the bank’s standard guidance which
does not rule out a further hike, he added that a “range of
model-based simulations” done by the ECB suggest the bank has
done enough.

While markets price no further rate hikes from the ECB
and expect a cut early next summer, conservative policymakers
were out in force on Thursday to argue that another hike was
still a possibility.

Not taking a side in this debate, Lane said uncertainty
was exceptionally high and it could be well into 2024 before the
ECB has the necessary visibility over wage trends, a
prerequisite in determining if inflation was heading back to
target.

Euro zone inflation was at 5.2% in August, well above
the ECB’s 2% target. The bank projects inflation holding above
3% next year and sees it below 2% only in the final quarter of
2025.

In response to audience questions, Lane noted high levels of
inflation are a very negative force for an economy, while he
declined to speculate what lies next for his bank’s monetary
policy.

“Inflation is horrible, it’s really costly, people hate it,”
Lane said. He said the ECB’s objective is to hit its 2% target
in the medium term.

Lane’s comment echoed that of Federal Reserve Chairman
Jerome Powell, who said Wednesday after a meeting where the
central bank held its short-term interest rate target steady,
that when it comes to price pressures, “people hate inflation,
hate it. And that causes people to say the economy is terrible”
even when they are continuing to spend money.

Lane wouldn’t say what’s next for ECB policy but he said
changes in interest rates are the most “efficient” way to affect
the economy relative to balance sheet actions.
(Reporting by Michael Derby; Writing by Balazs Koranyi; Editing
by Lincoln Feast and Christopher Cushing)