AIReF believes that the wage increases in 2023 will slow down the decline in inflation

Wages will begin to increase more dynamically this year to try to alleviate the loss of purchasing power suffered by workers last year, when prices rose an average of 8.4% in the year, but that increase in wages will be positive for workers it will slow down the drop in inflation.

This is what the Independent Authority for Fiscal Responsibility (AIReF) warns in its Report on the Stability Program Update, presented this Thursday and in which it deflated the Government's optimism regarding economic growth, employment, inflation and public deficit.

“In the AIReF scenario, the acceleration of wage demands that is projected in 2023 to partially recover the purchasing power lost in 2022 contributes to slowing down the decline in inflation in the short term,” they admit, just after employers and unions have reached an agreement to recommend wage increases of 4% this year.

They refer to the fact that the rise in wages gives more purchasing power to wage earners, which helps to maintain the rate of consumption and makes it difficult for prices to stop growing in the short term.. In 2023, AIReF “estimates that wages will accelerate, subsequently registering growth rates consistent with inflation.”

Specifically, they forecast an increase in compensation per employee of 4.4% and 4.7%, respectively in 2023 and 2024, which will exceed inflation. “In the following years, wage growth remains in line with inflation and expected productivity growth (with increases of 3.3% and 2.2% in 2025 and 2026, respectively),” they explain.

In the medium term, however, the institution chaired by Cristina Herrero believes that “the disappearance of supply tensions and the gradual transfer of financial conditions to demand will allow prices to be contained”, alluding to the impact that the rise in prices will have interest rates on family income.

According to his calculations, the time lag that elapses from when the Euribor rises and until this begins to affect families and curb consumption is 8 months, which is why he calculates that in the second half of this year and in 2024 it will begin to be noticed in consumption and domestic demand.

Drought stresses food prices

All in all, its inflation forecasts are higher than those of the Government and have recently been revised upwards, especially those for this year, when AIReF believes that the GDP deflator (an indicator that measures domestic production prices in the country) will rise on average 4.8%, compared to the 4% forecast by the Government.

“The general inflation rate has registered a notable decrease until April, due to the base effects associated with the comparison with the high price levels of energy products in the first months of 2022 and the moderation of energy prices. However, underlying inflation remains high, especially in tourist services and restaurants. Food also maintains upward pressures, despite the recent moderation in the prices of agricultural raw materials in international markets, due to the effects of the drought,” they warn.

According to their estimates, the CPI will stand at 4% on average, approximately half of what was observed in 2022 and below what was expected by the ECB for the euro area as a whole (5.3% according to March forecasts). ), but the expected increase in core inflation is notable (5.5% on average for the year). In 2024, the disappearance of the measures implemented to deal with the energy crisis would contribute positively to the growth of the CPI, which is projected at 2.8%. In subsequent years, inflation would moderate until it registered advances close to 2%, which constitutes the reference for the Eurosystem's monetary policy.