Euro-Zone Wage Growth to Quicken in Second Half of Next Year

Euro-area pay growth is set to accelerate in the second half of 2026, adding to the challenges the European Central Bank faces as war rages in the Middle East. The ECB's wage tracker predicts salaries will rise by an annual 2.5% in the third quarter and 2.6% in the fourth quarter. That's stronger than the projection for the first six months.

Inflation risks have risen after US-Israeli attacks on Iran triggered fighting across the region, sent energy costs surging, and threatened supply disruptions with the Strait of Hormuz — a key passageway for shipments — effectively shut. The European Central Bank kept interest rates unchanged last week as it weighed the impact of the war on Europe's economy.

Policymakers would be ready to raise borrowing costs as soon as next month if price pressures rose too far above the target, according to people familiar with the situation. They're concerned that faster inflation leads to ripple effects in the economy that keep prices high for longer. President Christine Lagarde said the ECB will be "particularly attentive to wage trackers" to prevent second-round effects from taking hold, adding that officials expected labor costs to ease in the course of 2026.

Why Did Wage Growth Rise in the Second Half of 2026?

The ECB's wage tracker indicates that negotiated wage growth will stabilize at around 2.6% by the end of 2026. The forward-looking horizon for the wage tracker remains unchanged at the end of December 2026.

Available forward-looking information shows that negotiated wage growth will continue to ease in 2026, with projections stabilizing at around 2.6%. The ECB wage tracker with unsmoothed one-off payments at 3.0% in 2025 and 2.6% in 2026.

The wage tracker excludes one-off payments indicates an easing of negotiated wage growth from 3.9% in 2025 to 2.6% in 2026. This suggests more moderate dynamics in negotiated base wages than in previous years.

How Did the ECB Respond to the Rising Wage Growth?

The ECB has kept interest rates unchanged as it assesses the impact of rising wage growth and inflation risks from the Middle East conflict. While the ECB is not currently raising rates, officials are prepared to act if inflationary pressures rise above acceptable levels.

President Christine Lagarde emphasized that the ECB will be "particularly attentive to wage trackers" to prevent second-round inflationary effects. Officials expect labor costs to ease in 2026.

For 2026, the headline ECB wage tracker averages 1.9% in the first quarter, 2.1% in the second quarter, 2.5% in the third quarter, and 2.6% in the fourth quarter. The increase over the course of the year mainly reflects statistical effects related to the treatment of earlier one-off payments rather than new wage pressures.

The ECB wage tracker with unsmoothed one-off payments also reflects a more stable and less volatile outlook for negotiated wage growth in 2026.

What Are Analysts Watching Next?

Analysts are closely monitoring the ECB's policy response as inflation risks rise from the Middle East conflict. The ECB is particularly concerned about the risk of second-round effects, where rising wages feed into higher prices.

The wage tracker excluding one-off payments is expected to hover around 2.6% in 2026. Employee coverage for 2026 stands at 44.1% in the first quarter, 41.3% in the second quarter, 37.1% in the third quarter, and 36.3% in the fourth quarter.

The ECB wage tracker may be subject to revision, and the forward-looking component should not be interpreted as a forecast. The ECB will extend the forward-looking horizon of the wage tracker to the first quarter of 2027 in the July 2026 data release.

Overall, the ECB's wage tracker provides a valuable tool for assessing wage pressures in the euro area. The results suggest that wage growth will remain moderate in 2026, despite the broader inflationary pressures from the Middle East conflict.