ECB Governing Council member Klaas Knot expressed confidence in inflation reverting to 2% target in 2025, but pointed out a crucial element that remains uncertain: the alignment of wage growth with this lower inflation expectation.
In an interview with the Dutch TV program Buitenhof on Sunday, Knot noted he “credible prospect” of it returning to the 2% target in 2025. However, “the only piece that’s missing is the conviction that wage growth will adapt to that lower inflation”.
Knot highlighted the current disparity between wage growth, at 5%, and the desirable rate of around 2.5% for sustainable price stability. He stressed that a gradual shift to this lower wage growth rate is essential for ECB to consider lowering interest rates.
He also anticipated “a couple of years” where wage growth may exceed inflation, “allowing a restoration of purchasing power,” However, he assured that this scenario would not hinder the trajectory towards the 2% inflation target.
Nevertheless, he suggested that this scenario wouldn’t necessarily impede the achievement of 2% inflation target. He argued that there’s sufficient leeway in profit margins to accommodate these higher salaries without triggering a significant secondary surge in prices. However, Knot cautioned that this is a “narrow path,” requiring careful navigation.