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2022/11/16 / Erste Group Research

CEE Special | Is wage-price spiral a real threat for CEE?

The second-round effects are likely to remain a concern for central banks over the next year, as the pass-through effects of the recent shock on the wage and price setting mechanism are likely to come only with a delay. Moreover, they potentially may lead to a wage-price spiral. In order to enter the spiral, several pre-conditions have to occur in the economies, however. Inflation has been soaring, but the first signs of moderation have begun to appear and inflation expectations, although high, remain anchored. Further, recession is knocking on the door and reducing demand pressures. On the other hand, the labor market has never been so tight, supporting dynamic wage growth. Central banks in the region reacted promptly with substantial interest rate increases and paused only recently. Finally, an easy fiscal policy is another important factor, weakening the monetary authorities’ efforts to curb inflation.

In general, the pass-through effects of oil price shocks on wage and consumer price inflation have been found to be higher in emerging European economies than in advanced economies.

Does CEE region meets the wage-price spiral preconditions? Inflation has, beyond doubt, skyrocketed, hitting as high as 20% in Hungary in September. What is worrisome at this point is the fact that inflation numbers keep surprising to the upside and double-digit readings are expected well into 2023. Fortunately, inflation expectations of households have eased recently, as evidenced by consumer survey results. Further central banks delivered substantial interest rate increases over the lasy year. Tight labor market conditions as is the case in CEE (low unemployment rate, high vacancy rate) support inflationary pressure to persist as workers’ bargaining power is typically greater when labor demand is strong and the labor supply is tight. The structural aspects of the labor market in CEE, such as a shrinking working age population or low retirement age, tightens the supply of labor in the region, strengthening the position of workers in the bargaining process. One trigger for a shift in regime could be nominal wage increases beyond price increases and productivity gains. Nominal wage growth increased more visibly in 2022 in Hungary, Poland and Romania and, between January and August, the growth was double-digit in the three countries. Finally, governments should be designing their support and target it very carefully to avoid any broad-based stimulus which could be pro-inflationary in its nature at the end.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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