Wage indexation

Currently inflation increases rapidly in many countries. Yes, Argentine. The Euro-zone and EEA have mastered the peak of inflation due to shifting away from Russian dependency and cheap prices for energy and dealt with carry-on effects related to high energy inputs. The annual rate of inflation calculated for January 2024 has returned in the Euro-area to 2.8 % close to the European Central Bank target of 2% (compare figure below).  Inflation puts wages under pressure, because household with little savings have a very hard time to cope with sudden price increases. For society as a whole, inflation raises many questions of differential impact of inflation on different parts of society. Savings become devalued, but debt might become easier to be repaid in so-called real terms.
Wage earners suffer in terms of lower purchasing power unless in subsequent wage negotiations pay rises can be achieved. This then depends of negotiation power of groups or sectors of the economy. Trade unions have to enter into tough negotiations and conflicts to even regain the same status quo previously achieved in wage negotiations. A series of conflicts and economic readjustments by more or less powerful sectors or representation comes into play.
All this is happening in a year of a series of national and regional elections as well as the European Parliament election in June. Political turbulance and the rise of extremists might be a result of a lack of taking into account the needs of lower wage groups who are likely to feel the full blast of the high inflation previously still today. Wage indexation as in Belgium, which fixes wages to the rise in inflation previously takes out most of the explosive power of a sudden rise in inflation at the risk of an upward wage-price spiral. The recent inflation figures for Belgium, however, show that this is not the case. An overshooting has been followed by an undershooting of the Euro-zone inflation. The political disturbance and risk of redistribution to more powerful groups in society can be limited through general wage indexation or indexation of for example just minimum wages.
The Russian caused spike in inflation has been successfully mastered in the EU. The political economy of redistribution through inflation will remain an important element unless wage indexation is used in more countries to escape populists’ and extremists’ voices. (Image Eurostat data and ESTATEC app)