Market Strategist Evan Lucas explains why the Reserve Bank won’t be worried enough about wages growth to lift rates.
There continues to be a huge emphasis placed on the wage price index (WPI), with the Reserve Bank of Australia singling out WPI as ‘vital’ to its forecasting in the third quarter of last year.
The initial read of the latest figures was a ‘bounce’ and a beat on consensus. The data showed wages are starting to move off their record low base. WPI grew by 2.1 per cent year-on-year, which was 10 basis points ahead of the consensus, and 0.6 per cent quarter-on-quarter, also 10 basis point better than consensus.
However, on a real wages basis (taking inflation into account) year-on-year wages increased by 0.3 per cent – the private sector, which employs almost three quarters of the employed population, grew by 1.9 per cent year-on-year for the final quarter of 2017, just 0.1 per cent in real wage terms.
Off the base yes, but a long way off wage growth that will significantly influence inflation.
The flow-through effects of wage rises to the RBA’s core mandate of maintaining trimmed mean inflation at 2 per cent to 3 per cent are clear; increases in wages (already something that impacts inflation) leads to increased spending, which leads to increased inflation etc.
However, it could be argued this is a ‘chicken and egg’ scenario, as rises in gross pay has been tracking the inflation rate for three years now as mandated by employment law rather than market factors.
Wage rises are conditioned on continuing employment growth and the supply of labour. It is this point I believe that is more poignant in the current environment. Underutilisation is clearly keeping wages flat; 2017 was indeed the best year of employment since 2005 and the best year for full-time employment since 2003.
However, the increase in employment has allowed those that have fallen out of the employment market to re-enter, energised by the fact employment is ramping up. The catch for this group of people is they are finding they are remaining unemployed or underemployed (working but want to work more hours). This slack is why wage growth will remain low, and until the slack is absorbed by the employment market this gap will keep the status quo in wages.
The 2017 employment growth story needs to flow into 2018 and likely beyond to see the unemployment rate falling to a level of ‘full employment’, which will mean underutilisation will have been (or least begun to be) absorbed.
With wage growth remaining subdued and unlikely to boost core inflation for the majority of this year, at least the case for the rate rise is soft. In fact, once you look at WPI from a real wage perspective – wages haven’t moved since mid-2016.
This point backs the RBA’s recent forecast in the Statement of Monetary Policy that wage growth will be gradual and its impact on inflation lax – keeping the central bank on the sidelines for longer still.
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