Analysis: Eastern Europe’s next inflation problem: wages race with prices

A woman shops at the consumer electronics retailer Media Markt in Budapest, Hungary, May 2, 2022. Photo taken May 2, 2022. REUTERS/Bernadett Szabo

Register now for FREE unlimited access to Reuters.com

  • Strong wage increases amplify central bank policy challenge
  • Huge rate hikes have so far failed to curb inflation
  • Hungarian inflation in May at 10.7% yoy, Polish at 13.9%
  • Labor shortage puts workers in strong bargaining position

BUDAPEST, June 15 (Reuters) – With prices rising, 24-year-old Noemi Turi handed her employer in Budapest a wage request that was 16% higher than what she thought was acceptable a few months ago as double-digit inflation in East -Europe’s wages feed demands.

The small company, where the Hungarian university student works as a social media manager and copywriter, has awarded her almost the full desired amount.

“I was in a good bargaining position because management knows exactly what everything costs these days,” Turi said. “They knew I wasn’t just quoting this figure.”

Register now for FREE unlimited access to Reuters.com

She said it was not an option to live paycheck to paycheck without having any money left over as she enters her adult life. She did not disclose how much she received.

Double-digit wage increases at a time of double-digit inflation will be the next policy challenge for central banks in Hungary and Poland, whose massive rate hikes have so far failed to contain inflation.

Wage growth in the Hungarian private sector was well above the central bank’s 2022 forecast in the first quarter, with some analysts forecasting a 15% increase for the year. Since the beginning of the year, Polish companies’ wage growth has also exceeded market expectations.

A raise in the minimum wage, tax cuts for start-ups and wage bonuses in the public sector in the context of a pre-election spending wave that helped Prime Minister Viktor Orban win reelection in April have exacerbated Hungary’s inflation challenge.

With a planned two-step minimum wage hike of nearly 15% for the 2023 election year, Poland appears to be heading for a similar predicament, with some analysts saying a wage-price spiral is already unfolding in the country. largest economy in the region.

“It’s hard to argue that a wage-price spiral isn’t already in motion in Poland and we think inflation will rise above 15% in the summer and stay in double digits until at least the second quarter of next year. said Liam Peach of Capital Economics. †

“Poland’s policy mix is ​​not tight enough to cool the economy, as tighter monetary policy is only slowing down and is at least partially offset by a looser fiscal policy.”

And an impending food price shock in the coming months raises the risk of high inflation and wage expectations becoming entrenched, forcing central banks on the EU’s eastern flank to raise interest rates higher than markets currently expect.

“CEE inflation continues to rise and surprises positively,” Goldman Sachs analysts said. “We think the broadening of price increases in the CEE reflects strong second-round effects of the inflation overshoot.”

“WARNING REVENUE”

After noting the first rate hike since 2011, European Central Bank president Christine Lagarde said last week that inflation expectations in the euro area were “well anchored” and that, despite a recent rise in wages, there was no risk of a spiral.

Eurozone wages are also rising, but some wage increases may prove ephemeral as employers across the bloc choose to give one-time bonuses rather than permanent increases. read more

In contrast, Hungarian inflation expectations are well above the central bank’s target, while two-thirds of Polish companies surveyed in March predicted that future price growth would exceed current inflation, which is now at its highest point in nearly a quarter of a century.

Remarks by the governor of the National Bank of Poland, Adam Glapinski, last week that the bank was nearing the end of its rate hike cycle, put pressure on the zloty, which, along with the forint, has underperformed the region’s currencies this year. .

“This is a worrying turnaround, as there has been no improvement in inflation risks: we are seeing quite high inflation expectations, accelerating core inflation and strong second-round effects,” economists at ING said. “Wage pressure is also high, while the bargaining power of companies is weak.”

Hungary’s situation is even more precarious after the forint plunged to record lows this week, under pressure from a range of local factors, including the National Bank of Hungary which halved the pace of rate hikes despite inflation still rising.

The weakness of the forint, which has fallen about 7% against the euro this year alone, is also fueling inflation.

“Inflation developments justify a continuation of monetary tightening, which should last longer, and final interest rates will be reached later and at a higher level than previously expected,” said Orsolya Nyeste of Erste Bank.

The Hungarian central bank said wage increases in the coming months would be one of the crucial factors determining the length and extent of the tightening cycle. They can also pose a competitiveness challenge over time.

While Hungarian wage levels are still well below those in Western Europe, a survey by the German Chamber of Commerce has shown that sharp wage increases are becoming a major concern for German companies in Hungary.

German companies are already expecting wage increases of almost 10% on average this year, the highest ever.

Mercedes-Benz said it would raise wages at its Hungarian factory from July under a 2020 agreement, while rival carmaker Audi said it has increased wages for its workers in Hungary by more than a third on average over the past three years. .

Sandor Baja, general manager of employment agency Randstad, said high employee turnover is exacerbating Hungary’s wage challenge as workers receive significantly higher wages when they take on new jobs at another company due to the labor shortage.

“The fact that some 30% of workers say they are very strongly considering changing jobs should be something employers fear,” he said.

($1 = 384.06 forints)

Register now for FREE unlimited access to Reuters.com

Additional reporting by Agnieszka Pikulicka-Wilczewska in WARSAW Editing by Angus MacSwan

Our standards: The Thomson Reuters Trust Principles.

Leave a Comment

Your email address will not be published.