SPEECH
Underlying inflation
Lecture by Philip R. Lane, Member of the Executive Board of the ECB,
Trinity College Dublin
Dublin, 6 March 2023
Introduction
When inflation has been far from target for a sustained period and the process of monetary tightening has
1 ]
been under way for some time, there are three primary inputs into monetary policy decisions.[ First, in
view of the medium-term orientation of monetary policy, the inflation forecast over the next one to three
years plays an important role. Second, the incoming information on underlying inflation constitutes an
essential additional basis for assessing medium-term inflation dynamics, in view of the conditional nature,
2 ]
the lower frequency of production and the intrinsic uncertainty surrounding macroeconomic forecasts.[
Third, especially in view of the transmission lags from shifts in the monetary policy stance to the financial
system, the economy and inflation dynamics, assessing the incoming information on the transmission of
previous monetary policy decisions is also necessary for the appropriate calibration of monetary policy
3 ]
decisions.[
My focus today is on the second input: underlying inflation. The assessment of underlying inflation (which
should be understood in a broad sense, including the information contained in wage dynamics and
inflation expectations) should be viewed as a complementary cross-check to the inflation forecasting
process. In one direction, if the signals from underlying inflation at a given point in time support the
narrative embedded in the inflation forecast, this boosts confidence levels (among policymakers, market
participants, firms and households) in the inflation forecasts. In the other direction, if the signals from
underlying inflation at a given point in time are at odds with the inflation forecast, this calls for robust policy
decisions that take into account the different signals coming from the forecast and the analysis of
4 ]
underlying inflation.[
My plan for this lecture is as follows. First, I will discuss the conceptual issues involved in analysing
underlying inflation. Second, I will review the recent data flows that are relevant for assessing underlying
inflation in the euro area. Third, I will offer some concluding remarks on the role of underlying inflation in
the setting of monetary policy over the coming months.
Underlying inflation: conceptual issues
Ehrmann et al. (2018) summarise the basis for examining measures of underlying inflation as follows: "The
central bank faces the problem of distinguishing in real time the "signal" on medium-term inflationary
pressure contained in the HICP inflation data from the "noise" stemming from temporary or idiosyncratic
factors. To this end, measures of underlying inflation are routinely monitored. Generally, their purpose is to
obtain an estimate of where headline inflation will settle in the medium term after temporary factors have
[ 5 ]
vanished."
In view of the major dislocations of recent years (the pandemic, the energy shock, the war), it is helpful to
think of headline inflation as currently being driven by three factors: (a) pure noise; (b) a reverting
component; and (c) underlying inflation. In particular, the economics of dislocations suggest that there is
currently a substantial reverting component of inflation that is sufficiently long-lasting not to constitute pure
noise but that can also be expected to fade out over the near term. Examples of the reverting component
include: the passthrough of energy and food cost shocks to other sectors; the impact of bottlenecks; and
pandemic re-opening effects by which there are temporary mismatches between demand and supply in
contact-intensive sectors. These factors contributed to the sharp rise in inflation since the middle of 2021
and, even if there has been some easing or even a reversal in these factors, the adjustment process to
these shocks is still ongoing and is not likely to come to a sudden stop. While the adjustment process may
also affect medium-term inflation dynamics, the quantitative contribution to inflation is plausibly larger over
the near term than over the medium term. Since the peak impact of monetary policy is further out than one
year, this reverting component of inflation should be less important for monetary policy than the
mediumterm underlying component.
Since the standard measures of underlying inflation typically make a two-level distinction between the
transitory and persistent components of inflation, these standard measures should not be taken at face
value under conditions in which the slowly-reverting component might be (at least partly) mis-classified as
contributing to medium-term inflation dynamics. It follows that the interpretation of the standard measures
require additional analysis under current conditions to take into account the potential role of the reverting
component.
Before turning to the analysis of the range of indicators of underlying inflation, it is also necessary to
recognise that the trajectory of the underlying inflation component can be affected by shocks to the noise
and reverting components of inflation. First, even a pure noise shock can have a permanent effect on the
price level if a positive inflation shock is not followed by a subsequent negative inflation shock. This holds
even more strongly for a shock to the reverting component: since a sustained period of high inflation can
leave a large footprint on the price level if it is not fully reversed. In turn, a surprise permanent increase in
the price level can trigger medium-term inflation dynamics through its impact on the subsequent path for
nominal wages, as some unwinding of the initial decline in real wages can be expected and the wage
6 ]
adjustment process can play out over an extended period.[ Second, especially if there is a
backwardslooking component in how firms, households and financial market participants form beliefs, a period of
high inflation can persistently alter inflation expectations, with a direct and substantial impact on
mediumterm inflation expectations. Again, this risk is more substantial in relation to the reverting component than
the pure noise component of inflation.
For these reasons, actual inflation outcomes and measures of inflation expectations belong in the family of
indicators that are relevant in assessing the underlying inflation pressures. In one direction, strong
increases in headline inflation or an upward above-target revision in inflation expectations would reinforce
upward pressure on underlying inflation; in the other direction, a material decline in headline inflation or an
easing in above-target inflation expectations should alleviate upward pressure on underlying inflation.
Underlying Inflation: indicators and analytics
Inflation increased very quickly since the middle of 2021 (Chart 1). While the peak was at 10.6 per cent in
October, inflation has remained at a high level, with the February reading still at 8.5 per cent. Comparing
headline inflation to the various standard indicators of underlying inflation, Chart 1 also shows that the
decline in inflation has been primarily due to the easing of some temporary inflation pressures, most
7 ]
notably the remarkable decline in gas prices in recent months.[ Chart 1 also shows that various forecasts
(including the December 2022 Eurosystem staff projections) project a substantial decline in inflation later
in 2023 that extends into 2024 and 2025. The gap between standard measures of underlying inflation and
these forecasts poses significant interpretative challenges for policymakers.
Chart 1
Indicators of underlying inflation and inflation projections and expectations
(annual percentage changes)
Sources: Eurostat and ECB calculations.
The latest observations are for February 2023 (flash) for HICP and HICPX and January 2023 for the rest of underlying
inflation measures. The latest observations for market-based indicators of inflation compensation are for 2 March
2023. The SPF data show expected annual percentage changes one-year and two-years ahead of latest available (i.e.
Dec 2022) HICP data available at the time the Q1 2023 round was conducted (i.e. for Dec 2023 and Dec 2024) and
for the calendar year 2025. The Survey of Monetary Analysts and the December 2022 Broad Macroeconomic
Projection exercise (BMPE) by Eurosystem staff show quarterly forecasts. The cut-off date for data included in the
ECB staff macroeconomic projections was 30 November.
As shown in Chart 1, the ECB tracks several indicators of underlying inflation. Each indicator has its
advantages and disadvantages: monitoring a range of indicators helps to guard from any specific
8 ]
approach being affected by idiosyncratic factors and model uncertainty.[ The most prominent standard
indicator of underlying inflation is core inflation defined as the HICP excluding energy and food (HICPX),
which stands at 5.6 per cent in the February data. The latest available (January) estimates show that the
other underlying inflation indicators range between 4.1 per cent (Persistent and Common Component of
Inflation - PCCI - excluding energy) and 8.1 per cent (the 10 per cent trimmed mean). While the PCCI
9 ]
measures have eased in recent months, most other indicators do not show signs of a turnaround.[ In
overall terms, the range is not only elevated but also wide, indicating that there is a high level of
uncertainty about underlying inflation.
In trying to gain further understanding about underlying inflation dynamics, it is worthwhile to examine
momentum in inflation dynamics. While the typical focus is on an annual frequency (the price level today
compared to the price level one year ago), this necessarily implies some inertia in inflation measurement,
given the high overlap on a month-to-month basis in annual inflation calculations. At the same time,
switching focus to a much higher frequency (such as month-to-month inflation data) runs the risk of
increasing the noise-to-signal ratio in view of the role of seasonal and idiosyncratic factors in the monthly
data.
An intermediate option is to examine as momentum indicators the 3 month on 3 month
seasonallyadjusted inflation data (annualised for comparability purposes). Chart 2 shows the momentum indicators
10 ]
for the main HICP categories.[ While there has been a clear turnaround in energy inflation and there are
some signs of deceleration for food inflation, momentum for core inflation has not declined. In particular,
momentum in the goods category remains strong.
The momentum indicator for services inflation requires a nuanced interpretation. The basic series
suggests an easing of services inflation since November. An alternative series (the dashed line) that
excludes the impact of the cheap travel ticket scheme in Germany last summer indicates that services
inflation started easing in August but with a partial reversal in February, which came in at 0.1 percentage
11 ]
points above the January reading.[ Indeed, this alternative series may better capture the severe
pressure on services prices during the intense phase of pandemic reopening in the spring and summer of
2022 that was partly offset at the time by measures such as the German travel ticket scheme. In any
event, these differential momentum patterns reinforce the importance of taking a granular approach to
understanding inflation dynamics, since the relative contributions of the noise, reverting and underlying
components may vary across categories. Moreover, in relation to core inflation, the goods and services
categories are shaped by quite different forces, such that it is important to take due account of the
12 ]
individual trajectories of goods inflation and services inflation.[
Chart 2
Inflation momentum
(annual percentage changes; annualised percentage changes)
Sources: Eurostat.
Notes: Momentum is defined as annualised 3 months on 3 months rates, seasonally adjusted data. HICPX: HICP
excluding energy and food. The corrected momentum series on the right panel excludes the effects of the 9 euro ticket
in Germany.
Latest observation: February 2023 (flash).
In trying to assess the potential contribution of a reverting component to inflation dynamics, one basic
question to ask is whether the recent declines in energy prices should also contribute to lower food
inflation and core inflation in the coming months (over and above the operation of base effects by which
earlier price increases drop out of the inflation calculation). There are two potential channels. First, energy
constitutes a significant cost component for many sectors. During the phase of intense energy price
increases, these put upward pressure on costs and prices in other sectors over the last eighteen months.
While the impact on pricing decisions of cost declines may not be fully symmetric to the impact of cost
increases, some passthrough should be expected. Second, the decline in headline inflation means that the
increase in the cost of living (the overall price level) is now lower than expected in the December staff
projections. In turn, all else equal, less upward pressure on the cost of living should mean a lower path for
nominal wages (albeit playing out over an extended period), which is a central factor in the determination
of underlying inflation.
To assess passthrough from energy to core inflation (the first channel), it is helpful to look at the dynamic
correlations between these two components. Chart 3 shows that there were typically negative correlations
between energy inflation and core inflation in the first decade of the euro (possibly reflecting the
13 ]
endogenous reaction of monetary policy to headline inflation).[ However, positive contemporaneous
correlations were observed more frequently after the financial crisis. This could indicate that the speed of
14 ]
the pass-through from energy to core inflation has increased since the financial crisis.[ Over the last
eighteen months, the correlation of energy and core inflation has become increasingly contemporaneous -
reflecting that energy has passed through very quickly to core inflation and been an important factor in the
recent increase in core inflation in the euro area. This could imply that the recent decline in energy prices
could also be reflected much more quickly than usual in core inflation in the euro area.
Chart 3
Correlation of HICP energy inflation and HICPX inflation (including leads/lags)
Sources: Eurostat and ECB staff calculations. See for details on calculations: Rostagno, M., Altavilla, C., Carboni, C.,
Lemke, W., Motto, R., Saint Guilhem, A. and J. Yiangou (2019): Monetary policy in times of crisis. Oxford University
Press, 2021.
Notes: Rolling cross - correlation (moving window of 60 months) between HICP energy inflation at time 't' and HICP
excluding energy and food inflation at time 't+k', where k represents the lead/lag shown on the y axis of the chart.
Positive correlations are shown in blue and negative correlations in red.
Latest observations: February 2023.
The easing of pandemic-related supply bottlenecks is a second relevant factor in assessing the role of a
reverting component in inflation. Chart 4 shows the sustained easing in supply bottlenecks in recent
months, with the improvement largely due to the easing of supply constraints. While the improvement in
supply bottlenecks can be expected to alleviate one source of upward pressure on prices, it is not yet clear
the upward impact of earlier supply chain problems on final consumer prices has fully played out.
[whether 15 ]
Indeed, the current strength of goods inflation suggests that the easing of bottlenecks is not yet
feeding through into retail prices, even if there are indications of easing at the intermediate stage in the
pricing chain.
Chart 4
Supply bottlenecks indicators
(left: standard deviations; right: diffusion index in deviation from trend)
Sources: Federal Reserve Bank of New York (NYFED), S&P Global, Harper Petersen (HARPEX) shipping cost index,
European Commission, Eurostat and ECB calculations.
Notes: The common component in the left-hand side panel is computed using a dynamic factor model analysis on a
range of supply bottlenecks indicators (see "Supply chain bottlenecks in the euro area and the United States: where
do we stand?", Economic Bulletin, Issue 2/2022). The SVAR model in the right-hand side panel shows the contribution
of aggregate demand (due to demand and interest rate shocks) and aggregate supply (due to supply-chain disruption,
energy and other cost-push shocks) forces (see also De Santis, Economic Bulletin, Issue 8/2021). The model is
identified using sign and narrative restrictions as in Antolín-Díaz, J. and Rubio-Ramírez, J.F., " Narrative Sign
", American Economic Review, Vol. 108, No 10, 2018, pp. 2802-2829.
Restrictions for SVARs
The latest observations are for February 2023.
This is illustrated in Chart 5. Early in the pricing chain, producer price inflation and import price inflation for
intermediate goods have been decreasing strongly since April 2022 - reflecting lower pressures from input
costs including energy and raw materials. These appear to have fed through now also to later stages of
the pricing chain with import prices for non-food consumer goods decreasing from 8.6% in October to
7.0% in November and 5.8% in December. Producer prices for non-food consumer goods as the most
important leading indicator for goods inflation have also decreased in January after strong previous
increases and moderated from 9.4% in December to 8.8% in January 2023. Based on these
developments the ECB's indicator for producer price pressures (IPPI) estimates that the pressures on
16 ]
goods inflation are likely to be close to their peak and to decline over 2023.[ However, there remain
upside risks to the extent that previous increases in pipeline pressures have not yet fully passed through
to goods inflation.
Chart 5
Pipeline pressures for goods inflation
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: IPPI is ECB indicator for producer price pressures. Shaded area shows the 95% confidence interval for the
IPPI.
Latest observations: left panel: February 2023 (flash) for non-energy industrial goods inflation, January 2023 for PPI
non-food consumer goods and PPI intermediate goods, December 2022 for the rest. Right panel: 2023Q1 (based on
January and February) for goods inflation, 2023Q4 for the IPPI.
The pandemic has affected inflation dynamics not only through supply bottlenecks but also through the
supply-demand mismatches associated initially with lockdown episodes and subsequently with the
sustained re-opening of the euro area economy over the last year. As shown in Chart 6, limits to
shortterm supply elasticities meant that the recovery in demand enabled firms to also increase profit margins in
those sectors exhibiting supply-demand mismatches. To the extent that supply capacity should improve
over time and demand patterns normalise, the extraordinary conditions underpinning profitability in 2022
should not persist, with a decline in profit margins translating into lower inflationary pressures.
Chart 6
Sectoral wage and profit developments
(left: change since 2019 Q4 to 2022 Q3; right: gross operating surplus over real value added, level)
Sources: Eurostat, and ECB staff calculations.
Notes: Wages refer to compensation of employees, profits to gross operating surplus. Income for self-employed
people is included in wages. Latest observations are for 2022 Q3..
These factors can be jointly illustrated through supply-demand decompositions for goods inflation and
17 ]
services inflation, as is shown in Charts 7 and 8.[ For both goods and services, supply factors continue
to exert a strong influence on inflation. Lower energy costs, the easing of supply bottlenecks and the
lagged increase in supply capacity in response to the pandemic reopening should ease the supply
component of inflation over time.
Annual percentage change and percentage point contributions
Sources: Eurostat and ECB staff calculations.
Notes: Seasonally adjusted data. Decomposition based on Shapiro, A.H. (2022). NEIG inflation is the sum of
demanddriven, supply-driven and ambiguous components, calculated as the trailing sum of the last 12 monthly contributions.
While detailed price data are available for January 2023, the latest observation is for December 2022 as the turnover
series used as a proxy for activity are published with some delay. Latest observation: December 2022.
Annual percentage change and percentage point contributions
Sources: Eurostat and ECB staff calculations.
Notes: Combined passenger transport classified as supply-driven instead of ambiguous in September (as
classification as ambiguous was driven by the end of a special scheme of subsidised public transportation in Germany
- the so called "9 euro ticket"). Seasonally adjusted data. Decomposition based on Shapiro, A.H. (2022). Services
inflation is the sum of demand-driven, supply-driven and ambiguous components, calculated as the trailing sum of the
last 12 monthly contributions. While price data are available for January 2023, the latest observation is for December
2022 as the turnover series used as a proxy for activity are published with some delay. Latest observation: December
2022.
An alternative decomposition for the services sector is shown in Chart 9. This decomposition divides the
services sector into four sub-categories: (a) sectors that are both contact-intensive and energy-intensive
(33.0 per cent of total services expenditure); (b) sectors that are contact-intensive but not energy-intensive
(6.3 per cent of total services expenditure); (c) sectors that are energy-intensive but not contact-intensive
(10.2 per cent of total services expenditure); and (d) sectors that are neither contact-intensive nor
energyintensive (50.4 per cent of total services expenditure). We should expect the combined impact of the
pandemic cycle and the energy shock to be strongest in category (a) and weakest in category (d). Indeed,
we see that the contribution from category (d) has increased only very gradually, while the contribution
from category (a) has gone from about zero in the middle of 2021 to about two percentage points of
services inflation in January 2023. That is, nearly half of services inflation is being generated by the
category that is most affected by the energy shock and pandemic-related factors. To the extent that the
reversal in energy costs and the easing of pandemic-related factors reduces pricing pressures in this
category, this highly atypical configuration may not persist.
Chart 9
Services inflation - decomposition into contact-intensive and energy-sensitive items
Annual percentage change and percentage point contributions
Sources: Eurostat and ECB staff calculations.
Notes: Energy sensitive component based on items with a share of energy in total (direct and indirect) costs above the
average energy share across all services items. The latest observations are for February 2023 (flash) for services and
January 2023 for the rest.
Chart 10 provides a further perspective on the role of energy costs in determining core inflation by
allocating the 211 items in the HICPX into energy-intensive and non-energy-intensive groups. Before the
start of the energy surge in 2021 there was no link observed between the energy intensity (measured as
the direct share of energy in input costs based on input-output tables) and the cumulative increase in
inflation since December 2019. This picture changes when data up to January 2023 is taken into account:
the inflation rate of HICPX items has tended to be higher, the greater the energy intensity. This can be
seen as indicating the outsized contribution of energy to core inflation when energy inflation is very high.
The important role of the surge in energy prices observed since the start of 2021 is also reflected by a
sub-aggregate of HICPX including only those items with an energy share above average, which increased
by 6.7 per cent in January 2023 (albeit down from 7.0 per cent in December 2022), whereas the inflation
rate for the sub-aggregate of HICPX with an energy share below average stood at 4.3% in January (albeit
up from 3.9% in December 2022).
The right panel of Chart 10 also shows that inflation for the wage-sensitive sectors within HICPX has been
increasing steadily, even if remaining at a much lower level than the energy-sensitive component or overall
core inflation. We next turn to the inter-connections between wage inflation and price inflation.
Chart 10
Role of energy for HICPX inflation
(left: energy share in direct costs (x axis, percentage) and cumulated price changes in since December 2019 (y axis,
percentage changes) for 211 HICPX sub items; right: annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: Energy-sensitive component based on items with a share of energy in total (direct and indirect) costs above the
average energy share across all HICPX items. The latest observations are for February 2023 (flash) for HICPX and
Services, 2022 Q4 for negotiated wages and January 2023 for the rest.
Wage inflation and price inflation
The importance of labour costs in total costs in many sectors (especially in the services category) means
that wage inflation is deeply inter-connected with price inflation. Furthermore, the staggered, infrequent
and decentralised nature of wage setting means that it is likely to take several years for wages to adjust
18 ]
fully to the surprise price inflation that has already occurred.[ In this way, the wage adjustment process
may put upward pressure on price inflation over the next two or three years, even if the long-term
behaviour of wages were ultimately unaffected by the current inflation shock (with the stability of long-term
inflation expectations and aligned long-term wage dynamics reinforcing each other). That is, once the
equilibrium level of real wages has been attained after the wage catch- up phase, we might expect
nominal wages to grow at the rate corresponding to the sum of labour productivity growth and the two per
cent inflation target.
Chart 11
Nominal and real wage growth (consumer wages)
(index: Q4 2020 = 100)
Sources: Eurostat and ECB staff calculations.
Notes: Real compensation per employee and per hour are deflated by HICP (consumer wages).
The latest observations are for the third quarter of 2022.
Chart 11 shows that wage inflation has been below consumer price inflation since the start of 2021,
resulting in a decline in real consumer wages: for instance, the real value of compensation per employee
19 ]
declined around 5 percentage points below the 2021Q1 level.[ This can largely be attributed to the
unexpected and sudden nature of the increase in inflation. While some decline in real wages may be in
line with the adverse terms of trade shock associated with the surge in energy prices, some catchup in
real wages can be expected.
Indeed, the ECB indicator of negotiated wage rates, available up to December 2022, reflects a gradual
20 ]
increase in wage pressures since the beginning of 2021.[ Abstracting from one-off payments, there was
a steady but quite contained increase in this series through the fourth quarter of 2022, with the latest
values of annual growth rate around three per cent. Allowing for typical labour productivity growth of about
one per cent per year, a nominal wage growth of three per cent per year would be broadly aligned with
delivering our two per cent medium-term inflation target.
Chart 12
Experimental forward-looking tracker of negotiated wage growth in the euro area
(annual percentage changes)
Sources: ECB calculations based on micro-data on wage agreements provided by Bundesbank, Banco de España,
the Dutch employer association AWVN, Banca d'Italia, Banque de France, Bank of Greece and Oesterreichische
Nationalbank. Note: The euro area aggregate is based on data from Germany, France, Italy, Spain, the Netherland,
Austria and Greece. Indeed wage tracker: Data on nominal wage growth in job postings covers six euro area countries
(DE, ES, FR, IE, IT and NL) and is based on "Wage growth in euro area countries: evidence from job ads" - P. Adrjan
& R. Lydon, Economic Letter, Central Bank of Ireland, Vol 2022, No. 7.
The latest observations are for December 2022.
However, as shown in Chart 12, there are two indicators that suggest that the negotiated wage indicator
understates the current degree of nominal wage momentum. First, a broader forward-looking experimental
tracker of negotiated wage growth has been developed by the ECB in cooperation with national central
21 ]
banks (Chart 12).[ This wage tracker aggregates information from collective bargaining agreements
across euro area countries and includes information on the latest wage increases that have been agreed
22 ]
for 2023.[ Contract negotiations during 2022 have typically delivered a 4.4 per cent wage increase for
2022 and a 4.8 per cent increase for 2023. Additionally, the wage increases agreed for 2023 have shifted
upwards towards the end of the year over 2022. This suggests that nominal negotiated wage growth
based on latest agreements is set to be higher this year compared with the level that would be consistent
in the medium term with the two per cent overall inflation target.
A second wage growth tracker based on Indeed job postings data has been developed by Adrjan and
23 ]
Lydon (2022).[ These data reflect the pay offered to the marginal worker (a new hire). At the same time,
it should be recognised that, in a tight labour market, hiring wages are likely to outpace the wages offered
to existing workers such that the level of the wage growth tracker is not necessarily an indicator of the
expected future level of aggregate growth in negotiated wages. Rather, it is more likely to serve as a
leading indicator of the momentum in wage dynamics. For instance, the earlier pickup in this wage tracker
since summer 2021 foreshadowed the subsequent pickup in the negotiated wage growth measure and the
strong increases in the wage tracker indicator during 2022 suggest that there will be further increases in
the growth rate of overall negotiated wages. At the same time, this tracker shows some tentative signs of
easing in the latest readings.
In view of these developments, the December 2022 Eurosystem staff projections were based on an
assessment that compensation per employee growth will increase from 4.5 per cent in 2022 to 5.2 per
cent in 2023, 4.5 per cent in 2024 and 3.9 per cent in 2025 and unit labour costs by 3.2, 5.0, 3.1 and 2.6
24 ]
per cent, respectively.[ The higher-than-normal nominal wage increases largely reflect the catch up
process following the drop in real wages that has occurred since the middle of 2021.
These rates of high wage growth are expected to lead to a rotation toward wage growth as a main driver
of underlying inflation in the euro area (Chart 13). The contribution of wage intensive items - defined as
those HICPX items for which wages account for more than 40 per cent of input costs - has increased with
the upward trend of wage pressures after the pandemic but has so far remained moderate. However, the
high levels of wage growth projected for 2023 and 2024 can be expected to make wages an increasingly
dominant driver of underlying inflation in the euro area. Accordingly, on an ongoing basis, the close
inspection of the latest wage developments is a high priority in assessing underlying inflation.
Chart 13
Decomposition of HICPX inflation by wage intensity of items
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Note: HICPX wage sensitive items are a composite measure based on items with a share of wages in direct costs
above 40%. Forecast based on the December Eurosystem staff projections.
Latest observation: February 2023 (flash) for HICPX, January 2023 for wage intensity and 2024 for forecast.
Inflation expectations
There is a clear risk that an extended period of above-target inflation may induce consumers, workers,
firms and financial market participants to re-consider their beliefs about the future path of inflation,
especially if the behavioural norm for many economic agents is to follow adaptive belief-formation
processes by which high current inflation generates a persistent increase in the expected future inflation
25 ]
rate.[
Chart 14 summarises a range of indicators of inflation expectations. Panel A shows that one-year ahead
inflation expectations eased slightly and the three-year ahead inflation expectations remained stable in the
December vintage of the Consumer Expectations Survey