Avoiding a Persistent Inflation Loop: Spain’s Central Banker Signals Caution on Wages and Pensions
The Governor of the Bank of Spain, Pablo Hernandez de Cos, underscored rising concerns about a broadening trend of inflation that could spread across more items in household spending, starting with energy and food. He warned that if this trend persists, indirect effects may intensify and become self-reinforcing in a second round of price increases. This assessment was shared during his appearance before the Congress of Deputies as part of the bank’s annual report delivery.
Even in the face of stalled negotiations between unions and employers, Hernandez de Cos reiterated the importance of an income policy framework. He described an approach where workers and firms agree on wages and benefits with a view to smoothing variations, and he proposed extending this framework to pensions and related benefits. The annual report recommends anchoring purchasing power to a minimum level of pensions while allowing for increases in 2023 that align with the average inflation noted in November 2022, which is around 6 percent. For pensions beyond that minimum, the Bank advocates a more moderate rise, aligned with the broader inflation trajectory. He emphasized that all citizens should share in this income framework without discrimination, and highlighted pensions as a central example in the discussion.
Hernandez de Cos also remarked on the current economic hardship caused by higher energy costs, noting that the country has entered a phase where purchasing power has eroded. The broad message was that while it is not possible to reverse the price shock overnight, policy should focus on distributing its effects fairly and maintaining social cohesion through targeted support where feasible.
In relation to collective bargaining, the governor cautioned about the growing use of wage indexation clauses designed to guarantee that salary rises keep pace with inflation. He pointed out that the share of contracts containing such clauses rose from 17 percent at the end of 2021 to 30 percent by March 2022, after having been more widespread in the past. He warned that making these clauses a standard feature in wage agreements could feed a new round of inflationary pressure. Instead, he urged avoiding automatic wage boosts tied to price movements and using core inflation as a reference point. Core inflation excludes the most volatile components, such as energy and highly processed foods, to reflect underlying price trends. Any guidance on wage changes should be accompanied by explicit commitments to keeping profit margins in check and ensuring employment conditions remain stable.
Looking ahead, the Central Bank of Spain plans to refresh its forecasts in June, updating growth and inflation projections for the Spanish economy that were issued in April. The current projection for growth this year stands at about 4.5 percent, though the forecast may be slightly reduced. Likewise, the inflation outlook for the year is expected to be trimmed from the current 7 percent estimate, even as there could be some upward revision to the underlying inflation metric. The governor’s remarks indicate a cautious stance, balancing a desire to support growth with the need to prevent inflation from becoming entrenched.