Wages data for June offers relief for RBA
Wages growth was lower for the June quarter but still presents an upside risk to inflation, an economist warns.
The Wage Price Index (WPI) rose 0.8 per cent in the June quarter and 3.6 per cent annually, according to data released by the ABS yesterday.
Annually, wage growth eased slightly from the 3.7 per cent recorded in March to 3.6 per cent for the year to June. The annual growth rate remains at levels comparable to those last seen in 2012.
AMP deputy chief economist Diana Mousina said 0.8 per cent increase was slightly below expectations, with consensus forecasts and the RBA predicting a 0.9 per cent rise.
“If you annualise the June quarter data, it shows that wages growth is running at 3.4 per cent, well below its peak of 4.3 per cent in September last year but still around a 10-year high,” said Ms Mousina.
“Before the pandemic, wages growth was running at around 2 per cent per annum, so the ultra-tight labour market in recent years and high inflation environment has helped to lift wages growth.”
The main drivers of wage growth in the June quarter were the construction sector at 1.3 per cent and professional, scientific and technical services at 0.7 per cent.
With inflation now slowing, real wages growth improved, becoming less negative at -2.4 per cent year on year, up from a low of -4.4 per cent in December last year, said Ms Mousina.
“There will be a further improvement in real wages growth from here as inflation slows which is positive for consumer sentiment and household purchasing power,” she said.
Ms Mousina said September quarter wages growth is likely to show a strong increase, however, with the impacts from the minimum and award wage decision to flow through to the data.
“We see wages growth peaking at just under 4 per cent by late 2023,” she said.
“A slowing in the labour market and increase in labour underutilization will take some heat out of wages. However, wages growth could still surprise higher if the labour market doesn’t slow as quickly or as much as expected and if there are broader wage gains after the minimum wage decision in June.”
In the June quarter data, the share of jobs that had a greater than four per cent wage gain continued to grow and was 4.8 per cent, up from 2.3 per cent last quarter.
“If it continues to grow from here, it could be a problem for the inflation target,” she said.
Ms Mousina said while the data for the June quarter doesn’t indicate that wages have accelerated to an unsustainable that would threaten the 2–3 per cent inflation target, wages growth “still presents an upside risk to inflation”.
This is particularly the case is productivity growth remains low, she said.
“So, while [June quarter] data will let the RBA breathe a sigh of relief and is in line with the central bank remaining on hold, any signs that wages growth is reaccelerating would be a cause for concern,” she said.
In the minutes of its monetary policy meeting for August, the Reserve Bank said there are a wide range of scenarios for inflation, including the possibility that inflation doesn’t return to the target band by around mid-2025.
“This could occur if services price inflation declines more slowly than forecast, the recovery in productivity growth incorporated into the forecasts does not eventuate or if wages growth is more responsive to the tight labour market than assumed,” the RBA stated in its minutes.
“On the other hand, inflation could fall faster than anticipated if the decline in real household disposable income over the prior year weighs more heavily on consumption.”
The Reserve Bank said its decision to keep rates on hold for the August was based on the fact that it had already tightened monetary policy significantly and there were signs that this was working as intended.
The board also noted that the full effects of earlier tightening were yet to be recorded in the data and that consumption had already slowed significantly.
It also stated that there were early signs that the labour market” might be at a turning point and inflation was heading in the right direction”.
The board said that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable time frame.
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