High oil prices ignite broader inflationary pressures? The European Central Bank expects accelerated wage growth in the second half of the year.

The European Central Bank said on Wednesday that wage growth in the eurozone may accelerate in the second half of this year, and the bank is actively assessing whether the spill-over effects of high energy costs caused by geopolitical conflicts in the Middle East will require the ECB to announce an increase in the benchmark interest rate after many years. A European wage tracking index forecast released by the European Central Bank on Wednesday predicts that wage data for the third and fourth quarters will increase by 2.6% year-on-year, potentially driving overall inflation in the eurozone to increase further. This is higher than the average forecast for the first six months of this year, highlighting the policymakers of the European Central Bank's belief that high oil prices may spread to a wider economic sectors. However, this expected increase is still much lower than the wage peak of over 5% in 2024. The geopolitical conflicts that erupted on February 28 have seriously disrupted the global energy supply market. The shipping in the Strait of Hormuz, which accounts for about 20% to 30% of global oil and natural gas transport shares, has almost come to a standstill, causing supply shortages and significantly pushing up oil prices. As a result, the price of international oil benchmark, Brent crude oil futures, soared by 50% in the first quarter, hovering around $100 per barrel. As shown in the graph, European Central Bank policymakers generally expect that wage growth in the eurozone will significantly accelerate later in 2026 under the drive of high oil prices. European Central Bank policymakers are currently actively assessing whether factors such as wage demands will lead to the inflation caused by the Iran war penetrating into various industries and whether this level of escalation will continue. Following the European Central Bank's decision to maintain interest rates at 2% last week, European Central Bank President Christine Lagarde said that companies are not currently planning to significantly increase wages. But the European Central Bank still remembers the price surge in 2022 vividly, which may prompt workers to quickly demand increasing wages in the backdrop of high inflation. A survey released by the European Central Bank this week showed that European companies still expect wage growth to slow down from 3.5% in 2025 to 2.9% this year and 2.8% next year. The European Central Bank announced last Thursday that it will keep the deposit facility rate unchanged at 2%, in line with market expectations. The European Central Bank did not provide guidance on future decisions and reiterated that decisions will be made on a meeting-by-meeting basis based on information obtained at each meeting. The Governing Council of the European Central Bank said in a statement: "Upside risks to inflation and downside risks to eurozone economic growth have increased. The Governing Council remains in a good position to deal with current uncertainties." ECB President Lagarde said at a press conference after the rate decision that despite discussions on raising interest rates, and will reassess tightening policy at the June meeting, the current economic situation in the eurozone should not be labeled as stagflation, emphasizing that the situation is "completely different" from the 1970s. Lagarde stressed that the decision was made with insufficient information, but the committee not only unanimously agreed to maintain rates, but also had a "comprehensive and in-depth" discussion on the possibility of raising rates. She said that the next six weeks will be an important window for assessing the economic situation in order to make decisions based on more complete data at the June meeting.