Wages and profits take different paths in the energy shock

Two prices inside the shock

More expensive energy squeezes company inputs and household budgets together. In the September meeting account published by the European Central Bank on 8 October, August headline inflation was 3.3 per cent and energy inflation 14.3 per cent. The Council judged that energy’s full effect on prices had yet to emerge. I take that starting point seriously: policy responds after an initial cost increase while confronting its transmission into other price and income decisions.^[1]

The account’s wage measures complicate an explanation built around a single source of pressure. Annual compensation growth per employee slowed to 3.3 per cent in the second quarter and unit labour cost growth to 2.6 per cent. Negotiated wage growth declined to 2.4 per cent. Unit profit growth instead increased from 0.3 per cent to 2.2 per cent. Wages and profits were moving in different directions. Costs passed into a company’s price and losses compensated through employee income touch different sides of demand.^[1]

The balance sheet reached by rates

The Council raised the deposit rate from 2.25 per cent to 2.50 per cent in September, increasing all three key rates by 25 basis points. Its transmission works through the price of borrowing. In the meeting’s information set, corporate bank lending rates were 3.8 per cent in June and July and mortgage rates 3.5 per cent. Financial conditions had tightened modestly since the previous meeting. These levels describe the financing conditions preceding the new increase; they cannot measure its subsequent effect.^[1]

More expensive credit can restrain debt-financed spending and reduce the room for companies to pass higher costs into prices. That is an inference about transmission: the same move can also raise a borrower’s payment burden. Alternatively, easing energy prices offer a separate route to lower cost pressure without requiring a contraction in credit. The Council’s concern about persistence emphasises the risk of waiting for rapid relief. Slower wage growth also raises the possibility that demand is already receiving less support from income.^[1]

A decision without a fixed path

The tension also appears in staff projections. Headline inflation was projected at 3.0 per cent in 2026, 2.5 per cent in 2027 and 2.1 per cent in 2028. The projection for inflation excluding food and energy was 2.6 per cent in 2027. The Council judged the 25-basis-point increase robust across a broad range of scenarios and avoided committing to a subsequent rate path. That approach leaves room to reassess how much of the initial energy shock has become embedded in other prices at each meeting.^[1]

My conclusion is to read energy prices, wages, profits and the price of credit together. Stronger unit profit growth alongside easing wage pressure narrows an account of persistent inflation attributed solely to employee income. If energy costs ease while more expensive credit restrains spending, relief on the input side can reduce the burden on the same balance sheet. The decision sits between tightening against persistent price pressure and adding a burden to already weakening income support. Its meaning depends on how those flows combine over time.^[1]