Pay deals across the region are easing. The raises agreed between unions and employers rose 2.56% in the second quarter compared with a year earlier, a step down from the prior quarter's figure. That is far below the peak of 5.55% hit in 2024, when the post‑invasion energy shock was still feeding through.
For the European Central Bank, this is a reassuring signal. Slower wage growth means the risk of a sustained price‑wage spiral is receding. An isolated price shock may pass, whereas pay tends to stay high after it rises, making wage dynamics a bigger concern.
The ECB watches pay settlements closely because they are sticky. Higher wages give households more spending power, which can keep demand strong and allow firms to pass on costs again. That creates the so‑called second‑round effects that policymakers fear.
In July, ECB President Christine Lagarde said, "The tracking signals and broader surveys suggest pay growth is staying moderate." She added that the bank's own projections see wage increases remaining well below the 2024 peaks through early 2027.
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Some officials argue that waiting for hard proof of a wage‑price spiral would mean acting too late. This is a familiar debate among rate setters. The bank already raised its key rate by a quarter point in June, and second‑quarter growth came in better than expected, which complicates the next decision.
For investors, the cooler wage data is a useful sign. It reduces the likelihood that the ECB will need to accelerate its tightening path. Even with July's inflation uptick to 2.9% - partly driven by energy worries from the Middle East - the central bank may be willing to pause and watch.
The latest wage figure continues the slowdown from last year's peak, adding to evidence that the energy-shock surge is fading. With pay growth close to levels more compatible with the ECB's 2% target, the debate has shifted from whether to keep raising rates to how long to wait before any move. That makes the next data releases especially important for the outlook.
The real test is whether pay settlements continue to moderate. If they do, the ECB can afford to wait before raising rates again. If not, borrowing costs will likely climb further.
For now, the wage numbers give the bank room to hold steady. When pay growth slows, patient investing becomes more attractive, and the case for holding cash instead of fixed‑income assets weakens.
The bigger uncertainty is whether the ECB will trust its own projections or insist on hard evidence. History suggests that acting only after wage spikes become visible often forces more aggressive tightening later. That is why the next inflation print and the next wage tracker will be watched closely.
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