‘A little too strong for inflation’: What recent wage price data tells us about future interest rate decisions

by Admin
August 13, 2024

The annual pace of wage growth has remained at 4.1 per cent over the year to June, matching the pace set in the March quarter.

Some economists were hoping to see wage growth decline a little in the June quarter, to reduce inflationary pressures.

But a slowdown in private sector wage growth was offset by an increase in public sector wage growth, and that kept nationwide wage growth steady on average.

Overall, the annual pace of nationwide wage growth, at 4.1 per cent, is still slightly slower than the 4.2 per cent recorded at the end of 2023.

“The RBA will be somewhat relieved to see wage pressures subsiding,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

“However, absent an improvement in productivity growth, the current pace of wage growth is still a little too strong for inflation to return to target quickly,” he said.

The new Australian Bureau of Statistics (ABS) data show private sector wages grew by 0.7 per cent in the June quarter, down from 0.9 per cent in the March quarter.

Public sector wages rose 0.9 per cent, up from 0.6 per cent, seasonally adjusted.

Michelle Marquardt, ABS head of prices statistics, said the stronger June quarterly rise for the public sector was largely due to the newly synchronised timing pattern of Commonwealth public sector agreement increases.

“All Australian Public Service employees received pay increases effective 14 March 2024,” she said.

“This led to a larger increase in the contribution Commonwealth jobs made to public sector wage growth.

“Pay rises for these jobs had previously been paid at different times across quarters depending on the timing of individual agency agreements,” she said.

However, in annual terms, wage growth in the private sector was still faster than the public sector.

Private sector wage growth was 4.1 per cent in June quarter 2024, following three consecutive quarters at 4.2 per cent.

That was higher than the 3.9 per cent growth recorded this time last year.

Public sector annual wage growth was 3.9 per cent, higher than the 3.8 per cent recorded in March quarter 2024 and 3.1 per cent from the same time last year.

ABS officials say that reflects changes to new state and federal wage policies introduced across 2023.

The labour market and wages

The Reserve Bank, in its most recent forecasts, said a range of labour market indicators suggested that Australia’s labour market remained “tight” at the moment, but conditions have eased somewhat since the peak of labour market tightness in October 2022.

The graph below shows what that means.

It compares the latest observation of key labour market indicators (blue dots) with observations of recent extreme labour market tightness in October 2022 (orange dots) and more typical labour market outcomes since the year 2000 (grey bars).

Reserve Bank of Australia, Statement on Monetary Policy August 2024, page. 38

The RBA said it welcomed the slight easing of labour demand over the last year, but it also thought the labour market and broader economy were a little tighter than it had been thinking a few months ago.

That helped to explain why wage growth remained elevated, it said.

“Our assessment is consistent with a variety of indicators and information from the RBA’s liaison program that suggest utilisation of labour and other inputs have remained above historical averages,” it said.

“Labour market conditions are assessed as a little tighter relative to full employment than previously thought, but are still gradually moving into better balance,” it said.

On Tuesday, EY senior economist Paula Gadsby said the annual pace of wage growth would keep interest rates higher for longer.

“The wage price index (WPI) data supports our long-standing view that interest rates will remain where they are for some time,” she said.

“Wages growth is feeding into services prices and is one of the factors keeping inflation ‘sticky’.

“Despite a loosening in labour market conditions, wages growth remains high and continues to put pressure on prices. The battle to bring inflation down continues,” she said.

Could wage growth ‘ease sharply’ from here?

However, Commonwealth Bank economist Stephen Wu said the annual pace of wage growth “should ease sharply” over the year ahead, for a number of reasons.

He said the pulse of wages growth was best measured on a sequential quarterly basis, and since the peak quarterly growth rate of 1.3 per cent in September 2023, we have seen quarterly wages growth outcomes of 1 per cent, 0.9 per cent and now 0.8 per cent.

“There has been a clear and sustained downward trend,” he wrote in a note.

“The outsized wages gain of 1.3 per cent (quarterly) experienced in September quarter 2023, partly reflecting a 5.75 per cent increase in award wages, will drop out from the annual calculations.

“On a six‑month annualised basis, wages growth has dramatically declined too, from a peak of 4.7 per cent in the December quarter 2023 to just 3.4 per cent in June quarter 2024,” he said.

Mr Wu said the Fair Work Commission (FWC) this year also handed down a smaller 3.75 per cent increase, from July 1, 2024, than it did last year.

“While a lot lower than the previous year, the FWC noted that it was appropriate given easing inflation, the stage 3 tax cuts, and zero productivity growth,” he said.

“And in line with the ongoing loosening in the labour market, the pace of wage gains – particularly in the private sector – should slow further.

“Timely indicators, such as advertised salary growth on SEEK and income paid into CBA bank accounts, both suggest ongoing moderation in wages growth. And surveyed labour costs in the NAB business survey has also been moderating,” he said.

Posted 7 hours agoTue 13 Aug 2024 at 2:41am, updated 5 hours agoTue 13 Aug 2024 at 4:42am