While higher-than-inflation wage increases are popular, they can cause major headaches for central banks, especially in countries still struggling with inflation. This also applies to Romania, which is expected to end 2024 with one of the highest inflation rates in the EU.

And the success of reducing inflation is still ongoing, as evidenced by slightly better-than-expected percentages that have been received this year and that have forced some analysts to revise their end-of-year estimates upwards, writes Radu Krachun in his personal blog.

A big challenge for the NBR is the labor market, where the supply of labor does not match the demand either qualitatively or quantitatively. This situation is reflected in the high rate of salary growth in the private sector, where companies are constantly struggling to attract professionals or prevent the departure of existing ones. So the latest data on wage increases for January show that average net wages in the economy rose by more than 14% year-on-year, almost double the rate of inflation over the same period.

The problem is that such strong wage growth, coupled with the expected increase in pensions, is likely to lead to higher prices, which will slow the process of reducing inflation. Under these conditions, the BNR is also likely to be more cautious in releasing the interest brake pedal, delaying their decline.

BNR is no exception. Indeed, central banks want to see more austerity in developed economies: fewer jobs created, less unemployment, slower wage growth, all the things that signal a balance between supply and demand in the labor market. The goal is to prevent a wage-inflation spiral: wages rise because of inflation, and inflation is fueled by demand for goods and services that the economy can’t keep up with. So, the balance between supply and demand is restored through price increases, i.e. inflation, and through increased imports, i.e. trade deficit.

And so we come to Romania’s big problem, the still modest potential GDP that prevents it from having high and sustainable economic growth rates without inflationary pressures and large deficits. Solving this problem requires attracting a much larger part of the population capable of working in the labor market, encouraging immigration to Romania of specialists with medium and high qualifications (and not only the unskilled), an education system that better meets the requirements of the environment. business, development of transport infrastructure, stimulation of economic activity with high added value, promotion of scientific and research activities.

The need to take economic potential to another level is all the more important as aggregate economic demand will continue to remain high as a result of large infrastructure projects financed by the PNRR or the start of a large-scale reconstruction project in Ukraine. There are opportunities that should ideally bring economic acceleration to Romania, but are protected from economic stress and inflation.

Until this target is achieved, the BNR will have to monitor the risk of spiraling wage inflation. In other words, make sure we don’t live much better than the economy allows.

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