Euro zone firms see continued inflation, wage pressures - ECB survey

A woman holds Euro banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration

FRANKFURT, July 22 (Reuters) - Businesses across the euro zone continued to report mounting inflation pressures and an acceleration in wage growth, even as the overall growth outlook becomes increasingly murky, the European Central Bank said, based on a survey of 71 major firms.

Worried about steadily building inflation pressures, the ECB raised interest rates more than expected on Thursday and promised further hikes as even longer-term inflation expectations were starting to move uncomfortably high and above its 2% target.

"Contacts continued to report a high magnitude and/or frequency of selling price increases, as substantial cost pressures were passed through the value chain," the ECB said in a report on Friday.

Rising costs for energy and transport were the main concern for most firms, while prices for most materials and component inputs also continued to rise, the ECB added.

Although the ECB has played down wage growth fears so far, businesses pointed to a continued rise on earnings.

"Most contacts thought wage pressures were gradually building up," the ECB said after contacts with the 71 non-financial firms in late June.

"Around three-quarters of contacts expected existing or future wage negotiations to imply higher wage growth in 2023 than in 2022, with most contacts placing wage growth in 2022 at between 2% and 4%."

Policymakers fear that if inflation stays high for too long, businesses will start to adjust their wage-setting practices, setting off a hard-to-break wage-price spiral.

Even as prices and employment continued to rise, firms also pointed to waning consumer confidence that spurred fears of a recession later this year.

While households have ample savings for now, they are likely to increasingly feel the financial squeeze from sky high energy prices.

"There would clearly also be downside scenarios if gas supplies were to be curtailed even further," the ECB added.

Reporting by Balazs Koranyi; Editing by Kim Coghill

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