The Bank of Spain rejects raising wages at the rate of inflation

The increase in the cost of electricity and gas is assuming a rise in inflation that for now is not being transferred to salaries. Wages under the agreement grew by 2.2% in February, 5 points below the CPI (7.4%). And so the Bank of Spain considers that it should continue. The governor, Pablo Hernández de Cos, has indicated this Tuesday that formulas for automatic adjustment of salaries to inflation should be avoided because this “would significantly increase the risk of an eventual spiral of price increases”, contrary to what the unions.

Moreover, the governor assures that both companies and workers “must assume a loss” derived from an income pact that supposes a distribution of the Spanish economic decline due to recent cost increases. “It’s about sharing costs,” he explained at a meeting with businessmen organized by Hill & Knowlton to discuss the economic context after the invasion of Ukraine. “Neither workers will be able to maintain their purchasing power in the short term, nor will companies be able to maintain their margins,” he assured.

In this sense, the Bank of Spain defends that if all the adjustment fell on the workers, in the medium term the companies would also end up suffering the consequences by experiencing “a sharp decline in their demand”. But if all the adjustment were made on the companies, many would be forced to close. “All of this would end up translating into less job creation and welfare for citizens,” said Hernández de Cos.

Thus, it confirms that for now the distribution of costs between workers and companies is already taking place. On the workers’ side, “there is no doubt that they are losing purchasing power”, and on the companies’ side, the Bank of Spain confirms that they are not fully transferring the increase in costs to the prices of their products and that their margins have been reduced as a result of high inflation.

Temporary tax break

On the other hand, the governor of the Bank of Spain asks that the tax cut announced by the Government to deal with this price escalation be “temporary” so that the structural deficit does not increase even more. “Fiscal policy must act in a very focused way,” he explains, while emphasizing that efforts focus on supporting households, companies and sectors most affected by the shocks.

He argues that if a general fiscal impulse is given, it could translate into an “increase in bottlenecks in the most stressed sectors that would end up filtering through to prices.” In particular, to the lowest income households, which are the ones that suffer the most from the impact of inflation, and to the most energy-intensive companies.