Price hikes outstrip pay: study

Average living standards fell in the December quarter and the outlook for households is now weaker than at any time since the Hawke government in the 1980s.

An analysis by Canberra University’s National Institute for Social and Economic Modelling shows that wages rose by only 0.1 per cent in the quarter, one of the slowest rates on record, while living costs rose by 0.7 percentage points.

NATSEM principal research fellow Ben Phillips said the net 0.6 per cent fall in the December quarter meant living standards had now dropped for three of the past five quarters. The only increases, in the middle of last year, were the result of interest rate cuts rather than wage growth.

“We have had growth in our standard of living of around 66 per cent since our last major recession in 1990, so it should not surprise that we’d run out of steam at some point,’’ Mr Phillips said. “That point may well have been reached.”

Joe Hockey is expected to make the threat to living standards the theme of a speech he will deliver in Sydney this evening, in which he will unveil ­aspects of the Commission of Audit’s findings.

The Treasurer will argue that unless budget savings are made now, the next generation will be saddled with a heavy public debt burden as well as the cost of supporting growing numbers of retirees.

However, the NATSEM research shows that declining standards of living are a problem not only for future generations but one that confronts the government now. Over the full 2013 year, wage growth exceeded living costs only by 0.6 per cent, which was well below the long-term average growth of 2.6 per cent, which prevailed over both the 11-year stretch of the Howard government and the six years of the Rudd-Gillard government.

During the latter half of the Hawke-Keating governments, living standards rose by an average of 0.9 per cent. Partial data suggests there was a fall in living standards during the early years of the Hawke government when wage increases were deliberately kept below living costs under the government’s “accord” with the union movement.

Mr Phillips said prices for principal exports would not pay for further income growth, while there was no potential for income tax cuts, little scope for interest rate reductions and the jobs ­market was weak.

“It is hard to be bullish on household standards of living in the short term,” he said.

The Australian Bureau of Statistics will today publish the consumer price index for the March quarter which is expected to show prices rose by at least 3 per cent over the past year, right at the top of the Reserve Bank’s target band.

Commonwealth Bank chief economist Michael Blythe said inflation was being pushed ­higher by domestic structural forces that were beyond the Reserve Bank’s influence.

Domestic inflation has been rising by about 3.5 per cent a year for the past decade, while the cost of many imported consumer goods has been falling.

“The ageing of the population is pushing up medical and health- care costs, governments … are trying to raise revenue and there is a big increase in tobacco ­excise,” Mr Blythe said. “There is a list of these structural factors that account for 60 per cent of domestic inflation. It is why the slowdown in wages hasn’t been reflected in domestic inflation.”

He said a lack of job security was leading to the fall in wages growth. “Wages are running behind CPI inflation with real wages falling,” Mr Blythe said. “Looking into 2014, it is a trend that will probably continue.”

Treasury and Reserve Bank officials have argued that national incomes are threatened by falling export prices, reduced workforce participation as baby-boomers start retiring and by poor productivity.