De Cos reinforces the investigation on whether inflation is contagious to wages

One of the main risks identified by the Bank of Spain for the national economy is that the loss of purchasing power derived from inflation translates into higher salary demands. “Though at the moment salary increases are being limitedin a context of tension in the labor market and increased inflation expectations by economic agents, the current inflationary dynamics could lead to appreciable second-round effects, which constitutes an element of risk for the paths of inflation and of growth in the medium term”, collects the institution in its quarterly report. For this reason, the BdE has reinforced the investigation on the real incidence of these effects through the textual analysis of collective agreements.

According to sources from the institution, “the follow-up of the statistics on collective agreements is carried out on a regular basis at the Bank of Spain and In the current environment of high inflation, it has become more relevant. In particular, we have reinforced the analysis on two fronts. On the one hand, in the past an analysis of the collective agreements already signed that are valid for the coming years was already carried out. Now, we have reinforced this analysis by expanding its coverage and thus being able to carry out a monthly update each time new agreements are registered. On the other hand, it has been a textual analysis of the content of the safeguard clauses of the registered agreements to improve the analysis of their potential impact on labor costs in the coming years”.

At the moment, the institution already warns that there has been “a certain rebound in the incidence of salary safeguard clauses.” This year, are present in almost 27% of the agreements, compared to 15.7% in 2021. Thus, although salary increases reach 2.4%, compared to 1.5% last year, the negotiation between employees and employers more commonly includes a clause to review the Remuneration based on how prices evolve. In addition, this occurs in a scenario in which “long-term inflation expectations show an upward trend, although the pass-through to wages is still limited.”

Based on this investigation into the agreements, the Bank of Spain does not rule out review your financial prospects, presented last Friday, according to the general director of Economy and Statistics, Ángel Gavilán. “Based on textual analysis, we are trying to extract information that could lead us to revise this year’s forecasts,” he explained. Not counting the impact of the crisis with Algeria, nor the extension of the measures included in the response plan to the war in Ukraine, the BdE estimates that average inflation -harmonized index of consumer prices (HICP)- will be at 7.2% this year. The entry into force of the cap on the price of gas used to generate electricity will only subtract half a point from the HICP.

In the scenario included in the report, the Bank of Spain “assumes that salary demands will respond in a limited way to inflationary spikein line with what has been observed to date”, but as mentioned above, it does not rule out that if inflation continues to rise for longer than expected, workers will demand salary increases to recover purchasing power. In fact, the institution forecasts that food prices continue to rise and reach a year-on-year rate of 6% in the first quarter of next year, to moderate between 3 and 4% in the first three months of 2024.

The Bank of Spain will be “vigilant” on the evolution of underlying inflation and assures that “very predictably, inflation rates will be higher than what we have seen” in recent years. For 2022, the institution estimates that the average index without energy or food will be 3.2%, still more than one point above the price stability level established by the European Central Bank (ECB), at 2%. The latest data published by the National Institute of Statistics (INE), corresponding to the month of May, showed a year-on-year underlying inflation rate of 4.9%.

rent agreement

Faced with this situation and the perspectives drawn by the body, the BdE has been calling for an income pact in which pensioners will also participate. However, this proposal has not been considered by the Executive, which has reiterated that pensions will be revalued based on the CPI, as established by law. At the beginning of this month, the governor of the BdE, Pablo Hernández de Cos, warned in an appearance in the Congress of Deputies that the implicit covenant to which companies and workers seemed to have arrived, for which a reduction in margins was taking place and there was no transfer of inflation to wages, was running out. For this reason, he insisted on the need to reach an income pact that avoids reaching these second-round effects that can contract economic growth and weigh down Spain’s competitiveness compared to other economies.

Pending an agreement that now seems frozen, the Bank of Spain will closely monitor the drafting of new sectoral agreements in order to determine whether the effects of the second round put the Spanish economy at risk of an inflationary spiral. In addition to the forecasts, and after knowing that the Government will extend the measures of the response plan to the war, the supervisor foresees a very slight increase in GDP, of less than one tenth and a reduction in inflation of more than three tenths for this year, if the fuel discount and the fiscal measures linked to electricity are extended until September.


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