MNI ANALYSIS: After Wage Data RBA Expectations Mgment In Focus

By Sophia Rodrigues

     SYDNEY (MNI) - A small pickup in wage growth in Q4 offer a glimmer of hope

for Australia's consumption and inflation outlook, but the complex relationship

between the three means it could take a long time for inflation to reach a level

that could trigger a rate hike by the Reserve Bank.

     There is, however, another ray of hope that could reduce this timeframe.

Governor Philip Lowe's strategy of managing wage expectations -- a rare strategy

for a central bank -- aimed at changing people's expectation of 2% wage growth

to a higher one. Lowe is attempting to play the role of an intermediary between

inflation and wage growth, thus helping wage growth accelerate faster and

through it, consumption and inflation.

     Without this, the downside risks for monetary policy remain but continued

patience from the RBA means any cut in the cash rate is unlikely.

     Wage cost data are now among the main economic releases in Australia given

the importance of wage growth to both growth forecast via consumption, and

inflation. But the relationship between wage growth and inflation is so complex

that it is hard to understand what follows what, and how much transmission might

occur.

     The Q4 data published on Wednesday by the Australian Bureau of Statistics

showed the wage price index rose 0.6% q/q, taking the y/y rise to 2.1%, which

marked the fastest pace of growth since Q2 of 2016.

     A pickup in wage growth could ordinarily be expected to result in an

inflation pickup, but because transmission may no longer be perfect and there

are other factors still dragging inflation lower, there is no guarantee

inflation accelerates.

     --WAGE EXPECTATIONS

     If inflation, especially headline CPI, doesn't pick up, it could have an

effect on future wage growth because past inflation outcomes shape inflation

expectations and in recent years have had a significant influence on wage deals.

     In that sense, inflation expectations shape wage expectations and the

latter is so important that it is one of the two parts of the monetary policy

strategy adopted by Governor Lowe.

     Lowe, during a post-speech Q&A in November, revealed that managing wage

expectations was one of his strategies. He reiterated this during Parliamentary

testimony earlier this month, saying that one part of his strategy is to have

low interest rates and the other part is to talk publicly about the benefits of

stronger wage growth. 

     What Lowe is really doing is playing the role of an interventionist because

left to themselves wage growth and inflation could continue dragging each other

down, thus delaying the timeframe for inflation to return to the mid-point of

the target band.

     If Lowe is successful, people would start accepting wage growth needs to be

higher than 2.0% or 2.1% and possibly as high as 3.5%, and this could translate

to higher wage outcome. It is worth pointing out that Lowe thinks average wage

increases over long period of times needs to be around 3.5% for the RBA to

deliver average inflation of 2.5%. 

     --WILL LOWE SUCCEED?

     A key question is whether Lowe can succeed in his strategy when headline

inflation continues to disappoint and has been below the RBA's 2% to 3% target

band for 12 of the last 13 quarters. The damage of past subdued inflation has

already been done with new enterprise bargaining agreements incorporating

smaller wage rises than the agreements they replace. This is likely to limit

overall wage growth for a time and thus inflation.

     There is also the issue of slow growth in wages in the retail and some

market services sectors. In retail it is caused by strong competition among

retailers and weakness in discretionary consumer spending, which is putting a

pressure on their margins and limiting their ability to pay higher wages.

     The latest data on wage price index shows this trend is continuing with

wages in retail trade sector slowing to +0.2% q/q from +0.9% in Q3 and in y/y

terms slowing to 1.6% compared with 1.8% in the same quarter of 2016.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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