Inflation

Higher Real Wages Thanks to Lower Inflation in 2024

What is currently happening with inflation in Slovakia and the Eurozone?

The situation continues to gradually stabilise. The inflation peak is behind us, and this year’s inflation will decrease even faster than we expected. The average inflation for the entire year 2023 reached 10.5%, the fourth highest reading in the 30-year history of independent Slovakia.

The worst is behind us —figures from the end of last year indicate just under 6%. Nonetheless, returning inflation to desired levels in both the Eurozone and Slovakia will take more than a year, and the path will not be without obstacles. A more substantial and faster decline in inflation in Slovakia will be hindered by energy prices, which we anticipate will reach market prices only in about two years.

We have reached a turning point and inflation rates are finally dropping, but it will take some time before we return to the levels we want and need to achieve—namely, an inflation rate of 2%. It is important that we wait and ensure we have enough evidence that inflation is safely returning to target. Only then will we be able to state that we have successfully tamed inflation and can proceed with lowering interest rates.

What about inflation and wages?

The labour market remains stable, with unemployment dropping to the historically lowest level recorded before the pandemic. Therefore, companies are increasingly hiring foreigners, with their number approaching 100,000. The high rate of inflation has fully translated into employees’ demands for wage increases. Significant wage increases have occurred and will continue, especially this year.

Real wages will finally grow faster than inflation this year. As a result, households will have more money for consumption, unlike last year when many had to dip into savings or cut expenses. This is good news for the economy, which is largely driven by the growth of household consumption. However, wage growth is also one of the main risk factors for the future development of inflation. Excessive wage growth increases costs for companies and household consumption, both of which can push prices up and thus prolong the duration of strict monetary policy.

Slovaks and inflation expectations

People’s expectations of inflation affect their decisions on how much to save, when and what to buy, what type of mortgage to take, or what salary to ask for. After record high values at the end of 2022, Slovaks’ inflation expectations are starting to decline, but they are still significantly above the officially measured inflation rates.

Women, the elderly, the less educated, the unemployed, and those with lower incomes tend to perceive and expect higher inflation on average than others. The perception of inflation and its expectations are interconnected, linked by experiences during everyday purchases. With the decrease in food price inflation, people’s inflation expectations should also decline.