Today, an important element keeping underlying price pressures subdued is muted wage dynamics, which are shaped by many factors. At this stage, besides weak productivity developments, there is still a significant degree of labour market slack that keeps a lid on wage growth.
Furthermore, the process of setting wages is to some extent backward-looking in a number of euro area countries, reflecting formal and informal indexation mechanisms.2 Additionally, the timing of wage negotiations plays a role in postponing the point in time when growing confidence that inflation is approaching the ECB’s intended medium-term level starts to become more visible in aggregate wage figures.