For most of 2025, HR teams could treat inflation as a problem that had been solved. That is no longer the case. Euro area inflation rose to 3.2% in August 2026, up from 2.0% a year earlier, and the European Central Bank expects it to peak at 3.6% in the fourth quarter of 2026 as the energy shock linked to the Middle East conflict feeds through to prices (Eurostat, 2026a; European Central Bank [ECB], 2026a). The link between inflation and salaries is back at the top of the agenda, just as compensation and benefits (C&B) teams are closing their 2027 budgets.

This guide is written for HR directors, Total Rewards leads and compensation analysts. We look at how much purchasing power employees have lost since 2021, what today’s inflation means for a typical 3% raise, and how to respond without losing control of payroll costs. We use official Eurostat, ECB and OECD data, and TalentUp salary data to translate percentages into euros.

Inflation is back: what the latest data shows

The rebound is not evenly spread. In August 2026, annual inflation reached 4.6% in Spain, 4.2% in Belgium and 3.6% in Portugal, while Germany (2.9%), the Netherlands (2.8%) and France (2.6%) remained below 3%. Across the EU, rates ranged from 0.3% in Sweden to 6.3% in Romania (Eurostat, 2026a).

What drives inflation matters for HR. In August, services contributed 1.43 percentage points and energy 1.29 points to the euro area rate (Eurostat, 2026a). Energy shocks tend to be temporary, but services inflation is closely linked to wages and tends to be more persistent. The ECB projects headline inflation of 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, with core inflation, which excludes energy and food, at 2.6% in 2027 (ECB, 2026a). In other words, prices are expected to cool, but not as quickly as many 2027 budgets assumed.

Wages, so far, have not reacted. Compensation per employee grew by 3.3% in the second quarter of 2026, down from 3.5% in the first (ECB, 2026b), and the ECB wage tracker points to negotiated wage growth of 2.7% in the first half of 2027 (ECB, 2026c). Hourly labour costs rose by 3.1% in the euro area in the second quarter, with wages and salaries up 3.0% (Eurostat, 2026b). With inflation above 3% and pay growth at or below 3%, real wages are once again under pressure.

Inflation and salaries since 2021: who lost purchasing power?

To understand how employees will react to the new price surge, HR needs to look back. Between 2021 and 2025, consumer prices in the euro area rose by 22.6% in total, while hourly wages rose by 19.2%. That leaves the average employee with roughly 2.8% less purchasing power than at the start of 2021, according to our calculations based on Eurostat data (Eurostat, 2026c, 2026d).

The picture varies widely by country:

The OECD reaches a similar conclusion. In its latest wage bulletin, it finds that real wages were still below their early-2021 level in half (19) of the 37 OECD countries analysed, and more than 2% below in a quarter of them, including Italy and Spain (OECD, 2026). To recover their 2021 purchasing power, employees in Italy would need a real increase of about 9.4%, and those in Spain about 4.8%, on top of current inflation.

This history shapes employee expectations. People who have already lost ground are far more sensitive to a new rise in prices. A raise that would have seemed fair in a low-inflation year can now feel like a pay cut, and that perception drives disengagement and attrition, especially among high performers with options in the market.

Is a 3% raise enough in 2027?

As we explained in our analysis of salary increase budgets for 2027, most Western European companies are planning increases of between 2% and 3%. Measured against current inflation, the real value of a 3% raise is negative in several key markets.

At August 2026 rates, a 3% raise is worth 1.6 percentage points less than inflation in Spain, 1.2 points less in Belgium and 0.6 points less in Portugal. In Germany, the Netherlands and France it still delivers a small real gain. Belgian employees are protected by automatic wage indexation, so the gap there will largely be closed by law, at a cost to the employer.

What it means in euros: TalentUp data

Percentages hide the real impact. The table below uses TalentUp’s median base salary for a data analyst in each country and compares the value of a 3% raise with the extra cost of living at August 2026 inflation rates.

For a data analyst in Spain, a 3% raise in this environment means a loss of over €600 in purchasing power. For HR, the question is not only whether the company can afford more, but which employees are most exposed and whether the gap creates a retention risk for critical roles.

Should salaries be linked to inflation?

When prices rise, employees and works councils often ask for raises that match inflation. There are good arguments on both sides, and most European employers end up with a hybrid approach.

The case against automatic inflation matching

The case for protecting purchasing power

The practical answer is to separate the inflation response from the merit budget: protect a minimum level of purchasing power for those most exposed, and use the rest of the budget to reward performance and correct gaps against the market.

How to respond to inflation in your 2027 pay strategy

1. Know your mandatory exposure

Start by quantifying the increases you are obliged to pay. In Belgium, automatic indexation links salaries directly to a price index. In Spain, many collective agreements include wage guarantee clauses that can trigger additional increases when inflation exceeds the agreed raises. In the Netherlands and Germany, collective agreements set increases for a large share of the workforce. Higher inflation means these obligations can be larger than planned, so model several inflation scenarios before you fix the merit budget.

2. Use one-off payments for a temporary shock

If you believe the current surge is mainly temporary, as the ECB projections suggest, a one-off cost-of-living payment can protect employees without permanently raising the salary base. Germany offered a clear precedent with its inflation compensation bonus, which allowed employers to pay up to €3,000 free of tax and social security contributions between October 2022 and December 2024. Check the tax treatment in each country before choosing this option.

3. Target support at the most exposed employees

Lower-paid employees spend a larger share of their income on energy and food, so they feel inflation most. Consider a tiered approach: a higher percentage or a flat-euro increase for lower salary bands, and a more performance-driven increase for higher bands. A flat amount in euros is often more effective than a percentage for protecting the lowest earners.

4. Watch for pay compression

The OECD notes that statutory minimum wages have risen more than median wages since 2021, compressing the bottom of the pay distribution (OECD, 2026). When entry-level pay rises faster than the rest, the gap between junior and experienced employees narrows, and experienced staff may feel undervalued. Review the distance between grades and the position of each employee in their band. Our guide to building good salary bands explains how to keep structures consistent.

5. Benchmark against the market, not just the index

Inflation tells you what has happened to the cost of living. It does not tell you what competitors are paying. A role can be well paid against the market even if it has lost ground to inflation, and vice versa. Market data should drive individual decisions, with inflation as context. Prioritise roles that are both below market and in high demand, where the risk of losing people is greatest.

6. Use the full reward package

Benefits can soften the impact of rising prices in a cost-effective way. Meal and transport allowances, childcare support and flexible benefit plans can increase net income at a lower cost than an equivalent gross raise, depending on local tax rules. Hybrid work also reduces commuting costs, which matters when fuel prices rise.

7. Communicate clearly and honestly

Employees know what is happening to prices. Avoid presenting a 3% raise as generous if inflation is higher. Explain how the budget was set, how it was distributed and what else the company offers. A clear total reward statement helps employees see the full value of their package. Under the EU Pay Transparency Directive, the criteria behind every increase must be objective and gender-neutral, so documenting decisions is now essential (European Parliament & Council of the European Union, 2023).

Inflation and salaries: a checklist for C&B teams

For a step-by-step calendar, see how to run a salary review cycle this quarter.

The bottom line

The relationship between inflation and salaries has become a strategic issue again. Most European employees have still not recovered the purchasing power they lost after 2021, and a new rise in prices arrives just as companies are planning cautious 2–3% budgets. The answer is not to match inflation automatically, but to understand where your people stand against both prices and the market, protect those most exposed, and use the rest of the budget to reward performance. Companies that get this balance right will keep their best people through another period of rising prices.

Want to know where your salaries stand? The TalentUp Salary Benchmarking Platform gives you real-time salary benchmarks by role, seniority, company size and city across Europe, so your inflation response is based on today’s market, not last year’s survey.

Frequently asked questions

How does inflation affect salaries?

Inflation reduces the purchasing power of a salary. If prices rise faster than pay, employees can buy less with the same income, even if their nominal salary goes up. This is known as a fall in real wages. Over time, high inflation also pushes up wage demands, collective agreements and statutory minimum wages.

Have salaries in Europe caught up with inflation since 2021?

Not in most countries. Between 2021 and 2025, euro area prices rose by 22.6% and hourly wages by 19.2%, a real loss of about 2.8%. Italy, Spain, Germany, the Netherlands and France are still below their 2021 purchasing power, while Portugal and Poland have recovered.

Should companies give raises equal to inflation?

Not necessarily. Automatic inflation matching turns temporary price shocks into permanent costs and leaves little room to reward performance. Most employers combine targeted protection for the most exposed employees, one-off payments for temporary shocks and a separate merit budget based on market data.

What is the difference between nominal and real salary increases?

A nominal increase is the change in the amount paid. A real increase is the change after adjusting for inflation. For example, a 3% raise with 4.6% inflation, as in Spain in August 2026, is a real decrease of about 1.6%.

What is a cost-of-living adjustment?

A cost-of-living adjustment (COLA) is an increase designed to offset rising prices, rather than to reward performance. It can be a permanent salary increase, an automatic indexation mechanism, such as the one used in Belgium, or a one-off payment.

Will inflation fall in 2027?

The ECB projects euro area inflation of 2.5% in 2027 and 2.1% in 2028, after a peak of 3.6% in the fourth quarter of 2026. Forecasts depend heavily on energy prices, so HR teams should plan for several scenarios rather than a single figure.

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