European Central Bank’s Rehn says wage growth remains moderate with no second-round inflation effects

Olli Rehn, Governor of the Bank of Finland and a key voice on the European Central Bank’s Governing Council, delivered a message on August 19 that euro area policymakers have been hoping to hear for years: wage growth is behaving itself.

Rehn stated that wage growth “has remained moderate” with “no clear signs of second-round effects.” In central banker speak, that means rising wages aren’t feeding back into consumer prices in a way that would force the ECB’s hand on rates.

The numbers behind the reassurance

The ECB’s own wage tracker tells a consistent story. Negotiated wage growth across the euro area is stabilizing around 2.6% for 2026, a meaningful decline from roughly 3% in 2025.

Drilling into the quarterly figures, the trajectory looks even more encouraging. Negotiated wages rose 2.46% year-on-year in Q1 2026, down from 2.89% in Q4 2025.

Rehn emphasized that keeping inflation expectations anchored is essential for maintaining these moderate wage trends.

Why second-round effects matter so much

The concept of “second-round effects” describes something intuitive. When energy prices spike (as they did dramatically after Russia’s invasion of Ukraine), workers demand higher wages to compensate. Companies then raise prices to cover those higher labor costs. Workers demand even higher wages. That’s a wage-price spiral, and it’s the scenario that keeps central bankers up at night.

The ECB has been monitoring this dynamic obsessively since at least 2022. Back then, energy costs surged, headline inflation in the euro area hit double digits, and there was genuine fear that wage negotiations would lock in permanently higher inflation.

What actually happened was more benign. Wages rose, sometimes sharply, but mostly as a catch-up to purchasing power that workers had already lost. The key distinction is that those increases didn’t trigger a sustained feedback loop into broader prices. Rehn’s latest assessment confirms that pattern has held.

What this means for ECB rate decisions

Rehn’s comments carry direct implications for the ECB’s rate path. If wage growth isn’t generating inflationary pressure, there’s less urgency to tighten policy or even to keep rates elevated. That’s a meaningful shift from the posture the bank adopted in 2022 and 2023, when it hiked rates at the fastest pace in its history to combat surging prices.

Rehn’s remarks, delivered as prepared speech comments, represent one data point in an ongoing policy debate. The ECB’s July 2026 wage tracker update provides forward-looking data that appears to corroborate his assessment.

The question investors should be watching is whether Q2 2026 negotiated wage data, when it arrives, confirms the downward trend from Q1’s 2.46% figure.