Eurozone Wage Growth Climbs to Almost 3% in Late 2025
Negotiated wages across the euro area picked up pace at the end of 2025, reinforcing the European Central Bank’s cautious approach to monetary policy.
- Negotiated wages in the euro area rose 2.95% year-on-year in Q4 2025.
- Services inflation remains above 3%, driven largely by labor costs.
- The ECB kept its deposit rate at 2% for a fifth consecutive meeting.
- Euro-area GDP grew 0.3% in Q4, with 1.2% growth projected for 2026.
According to fresh data released Friday, annual negotiated wage growth reached 2.95% in the fourth quarter, up sharply from a revised 1.89% in the third quarter.
The rebound suggests that wage pressures remain present in the economy, even as headline inflation has cooled. While the latest reading is well below the 5.4% peak seen in 2024, it signals that labor costs are not easing fast enough to give policymakers full confidence that inflation risks have disappeared.
Services Sector Keeps Pressure on Prices
Services inflation – closely linked to wage dynamics – stood at 3.2% in January 2026. Although this marks some moderation, it remains elevated compared to the ECB’s 2% inflation target. Policymakers view services prices as one of the stickiest components of inflation, largely driven by labor-intensive industries.
At its February 5 meeting, the European Central Bank kept its deposit rate unchanged at 2% for the fifth straight session. President Christine Lagarde emphasized that the Governing Council is closely monitoring salary developments, describing wage growth as a potential upside risk to price stability.
Markets had speculated about possible rate cuts later in 2026 as euro-area inflation fell to 1.7% in January. However, the latest wage data weakens the case for imminent easing.
Economic Growth Remains Modest
The broader economic backdrop remains stable but unspectacular. Euro-area GDP expanded by 0.3% in the fourth quarter of 2025, largely supported by services activity. Unemployment stood at 6.2% in December, suggesting a relatively tight labor market that continues to support wage gains.
For 2026, the ECB projects overall euro-area growth at 1.2%. Country-level forecasts show Spain leading with 2.3% growth, followed by Germany at 1.2%, France at 0.9%, and Italy at 0.8%.
Another variable complicating the outlook is so-called “wage drift” – additional payments above negotiated agreements. While negotiated wages are rising at a moderate pace, these supplementary payments remain harder to measure and could either amplify or soften overall labor cost pressures.
Looking ahead, the ECB’s internal wage tracker indicates that negotiated wage growth could level off below 3% by the end of 2026. Until clearer evidence emerges that labor cost pressures are fading, policymakers appear comfortable keeping interest rates on hold.
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