MNI INSIGHT: RBA Still Wants Wages Growth, Just Not Too Much

The Reserve Bank of Australia’s warnings of the danger of a wages-price spiral this week should not be interpreted to mean that the RBA is unhappy with earnings growth at current levels, and it still regards increases of around 3% a year as consistent with its long-term inflation target, MNI understands.

The Wage Price Index, viewed as a reliable signal of trends in labour costs, rose by only 2.6% in the year to June. The RBA forecasts the WPI will hit 3% by the end of the year and maintain a 3-handle out to the end of 2024, when it is expected to be 3.9%, still at what the Bank regards as tolerable levels, even if at the higher end of the range.

But at the same time, the Bank is warily watching what it regards as a super-hot labour market, as a sharp acceleration in inflation adds a layer of unforeseen complexity to its calculations.

Concerns about the interplay between inflation, wages, and corporate price behaviour featured in both Tuesday’s statement following a 50bps hike to 2.35% and the speech by Governor Philip Lowe speech on Thursday (See MNI: RBA's Lowe Says Case For Slower Hikes Becoming Stronger).

“Briskly” rising labour costs in some pockets of the jobs market were noted, while the Bank said it would also play “close attention” to the evolution of labour costs and corporate price setting.

Lowe even went so far as to invoke the “national interest” on Thursday, calling for unified action against the triggering of a wage-price rise spiral that changes inflation expectations given it would require the RBA to hike rates further. This message was delivered only days after the new Labor government hosted a jobs summit, which included a sizeable contingent of unions.

The RBA opened the door to a slower pace of the rate hikes this week, but wage restraint – in the form of lower real wages - will need to play its part in ensuring tougher medicine isn’t needed.

JOBS DATA AHEAD

Wage growth held a prominent position in Martin Place's thinking through 2021 and early 2022, as it sought to boost the increases of 2-2.5% which have been the norm over recent years. With labour productivity growth of just over 1%, such rates meant that unit labour costs were rising at only a little above 1% - too slow for inflation to land in the RBA’s target region between 2-3%.

Complicating the RBA’s interest rate considerations is getting a read on the wages situation, with other data implying pay may be rising more quickly than indicated by WPI.

ANZ calculates that Australia’s national accounts imply that average earnings rose 5.4% over the year, though while this data theoretically provides a more complete measure of labour costs than the WPI, it is also noisy and distorted by government programs like JobKeeper.

Fortunately, the Bank argues medium-term inflation expectations still remain well anchored. The challenge for wages growth is to not start over-revving now that it appears to have built up steam.

Next week’s August jobs market data will make for interesting reading given forecasts the unemployment rate could test the current 48-year low of 3.4%. The RBA expects unemployment to gradually rise to 4% by the end of 2024 as rate hikes start to bite.