European Central Bank president Jean-Claude Trichet has raised the prospect of further interest rate rises.
Speaking to the European Parliament's economic and monetary affairs committee in Brussels, he said that although euro zone inflation was set to fall in the coming months, risks in the medium term 'remain on the upside'.
While the risk of a renewed surge in oil prices still loomed, Trichet stressed in particular that higher wages could drive up inflation. He said the ECB would keep a close eye on negotiations between employers and workers.
The ECB raised its key interest rates earlier this month to a five-and-a-half-year high of 3.75% to keep inflation in check and has left the door open to further increases if the economy keeps gathering steam.
Trichet painted a favourable outlook for euro zone growth after a strong start to the year, pointing to firm domestic demand, exports and business investment.
With the euro zone in the midst of a strong economic recovery and unemployment at record lows, many workers are demanding wage increases as companies rake in bumper profits.
That has stoked fears at the ECB that rising wages could have a knock-on effect on inflation, which the bank prefers to see at less than, but close to, 2%.
