Energy price shock has not yet reflected in wages

Bank of Finland Governor Rehn stated that the shock in energy prices has not yet spread to wages, but the risk will increase if the conflict in the Middle East drags on.

Effects of the Energy Shock

Emphasizing the need to be cautious in a statement made in Helsinki, the Bank of Finland Governor noted that such effects can emerge gradually and unnoticed.

Rehn stated that the longer the conflict in the Middle East lasts, the greater the risk that the increase in energy prices will spread to a wider area.

ECB Policies and Inflation

After the energy shock pushed inflation well above the 2% target, the ECB has increased borrowing costs twice since the war began, with the latest hike taking place in September.

Strong demand makes it easier for companies to pass on rising costs to consumers, increasing the risk that the energy shock will begin to reflect more broadly on inflation.

Economic Outlook and Interest Rates

Rehn stated that although growth remains weak, the euro area economy retains its resilience.

While the boom in artificial intelligence investments has driven up demand for capital, long-term interest rates have risen, with growing public debt and global uncertainty also contributing to this situation.

Rehn noted that the increase in long-term interest rates has slowed economic growth, which in turn limits the pass-through of high energy prices to other prices and wages.