ASB: Wage Price Spiral Spells Trouble For The RBNZ

ASB note that the labour market “figures were still partly clouded by Omicron disruptions and potential HLFS noise. Looking beyond the quarterly volatility it is clear that the labour market still looks extremely tight, with employment well above its maximum sustainable level, stretched labour utilisation metrics and the unemployment rate still close to record lows. Wage inflation looks to be stirring, with annual growth in private sector labour costs rising to 3.4%, the highest since 2008. What’s more, the distributional figures showed a broadening front of wage increases, pointing to a wage-price spiral unfolding. Despite softening signs on the outlook for economic activity, we expect the labour market to remain tight and the unemployment rate to remain close to record lows over the 2nd half of 2022 and into 2023. High inflation looks to be increasingly entrenched and domestically driven and this necessitates forceful action and tough talk by the RBNZ to ensure future inflation outcomes align with the 1-3% inflation target. The global scene is wobbly and NZ and global growth is slowing, but we expect the RBNZ to deliver a 50bp hike in the August MPS and 125bp hikes in total by year-end (3.75% OCR peak). A relaxation in tight labour market conditions is needed to cool inflation, and we have flagged a 2024 timeframe for when the OCR can move to less restrictive levels.”