MNI POLICY: Strong Wages To Frustrate RBA's Inflation Hopes

The Reserve Bank of Australia will be closely watching September quarter salary data to gauge the effect of a rise in the minimum wage, with market participants telling MNI that persistently strong pay increases for workers coupled with weak productivity mean another 25-basis-point interest-rate hike is likely to be required some time next year.

While the current 4.1% level of the cash rate should push inflation below 4%, it may be insufficient to return CPI to the RBA’s 2-3% target band, said Callam Pickering, APAC senior economist at employment website Indeed.com and former senior analyst at the RBA. Inflation may instead stagnate at 3.5%, which would prompt further monetary tightening.

“Inflation next year may dip briefly into the RBA’s target band, but getting it there consistently could require higher rates, due to what we’re seeing in the services sector,” he said.

Pickering noted wages and falling productivity remain key concerns for the RBA and that wage growth will drive the next inflation wave. "The disconnect between wages and productivity will create issues for the RBA next year as it tries to pull inflation under 3%," he said. "Inflation will fall below 4% but the RBA needs something to shift with the wages-productivity dynamic to achieve that 2-3% target consistently.”

WAGE FOCUS

MNI understands the RBA is focused on September quarter wage price index data, due Nov. 15, which will represent the first full three-month period since Fair Work Commission wage adjustments came into effect on July 1. (See MNI BRIEF: Aussie Minimum Wage Lift Sparks RBA Rate Concerns) The wages index has increased consistently since the March 2021 quarter, though growth slowed to 3.6% in Q2 (see chart). The commission's wage increase will likely have a positive impact on the index’s Q3 print.

The RBA has focused heavily on falling levels of productivity this year, with outgoing Governor Philip Lowe calling on government to act last week to help stem inflation and protect the country’s high living standards during his last presentation in the role before Michelle Bullock takes over later this month. (See MNI: RBA's Lowe Calls For Monetary And Fiscal Alignment)

THE CHALLENGE

The RBA lacks specific data on how the recent wage increases have flowed through the economy and how significant any spillover effect into other sectors may be, MNI understands. While it has modelled the impact and made forecasts based on past yearly commission wage adjustments, it has not made these public.

Within its Aug. Statement on Monetary Policy, the RBA forecasted the wage index to peak at 4.1% by the Dec 2023 quarter before falling to 3.6% by Dec 2025, a stubbornly high level compared to the last 10 years.

The RBA continues to try to better understand the labour-wage nexus, as services increasingly becomes the key driver of inflation, as reflected in recent household spending data. (see chart)

“Historically, achieving the RBA’s target has required non-tradable inflation at about 4% and then we see either zero, or a really low measure, for tradables inflation,” he added. “Right now, non-tradable inflation is quite a bit higher and that’s mostly services sector driven by wages.”