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OPINION: Wages rising, inflation surging: Interest rates are next

·4-min read
Hands holding leather wallet with Australian $50 banknotes wages.
Most Aussies enjoyed a jump in wages across 2021. (Source: Getty)

Wages growth popped higher at the end of 2021 and, in terms of the money people get in their pay packets, the rise over the course of the year was a decent 3.8 per cent.

As we know from earlier data, inflation - or the price of the average basket of goods and services purchased by Australian households - rose by 3.5 per cent in 2021, which suggests real wages growth might be starting to edge up, fractionally, after an extended period of weakness.

Also by Stephen Koukoulas:

There are several ways the Australian Bureau of Statistics presents the average weekly earnings (AWE) data. The most relevant for assessments of labour costs that are actually paid by employers and received by employees is total earnings.

The Wage Price Index (WPI) and Average Weekly Ordinary Time Earnings data, which rose by around 2.25 per cent in 2021, are a narrow measure of labour costs.

The AWE total earnings data take account of issues including the number of hours worked by each worker. While an hourly rate for a job may be steady, for example, if you work 10 per cent more hours in a given week, the dollars and cents in your gross pay will rise by 10 per cent.

The WPI does not capture this effect, while the AWE total earnings does.

Similarly, if your boss gives you a promotion and a pay rise with it, the WPI will record zero change even though you may have an extra 5 or 10 per cent in your pay packet every week or fortnight. Sure, you have extra responsibility with that job, but the pay rate is higher too to reflect this.

And so it is that at the end of 2021, a mix of extra hours and promotions were supporting actual wages growth, even though pay increases for ‘like’ jobs were increasing by only around 2.25 per cent.

Private sector wages even stronger

It is also noteworthy that total average wages for the private sector were up a very strong 4.1 per cent. This is the more reliable guide for business labour cost pressures, since many public service wages have been frozen or seriously restrained in the wake of the COVID shock.

Clearly, the economy and labour market must be strong enough for the private sector to be asking their staff to work more hours and to give pay increases over and above any regulatory determined increases.

Wages growth should pick up further

There are many reasons to expect wages growth to pick up further from here and it all boils down to there being hot demand for workers of all skills, and there being fewer people available for that work as the unemployment and underemployment rates fall.

The unemployment rate is set to drop below 4 per cent for the first time since the 1970s and the various measures of demand for workers – job advertisements and vacancies - show Australia could even see an unemployment rate at 3.5 per cent by the end of 2022.

With such a tight labour market, private-sector wages in particular will likely move higher as firms compete for talent and, indeed, ramp up wages, bonuses and other incentive payments to retain and attract staff.

And while wages growth is set to increase, so too is inflation.

Pressure still on RBA

Tackling inflation is the responsibility of the Reserve Bank of Australia (RBA).

The RBA has been remarkably relaxed, even complacent, about the recent surge in inflation given it is signalling it is likely to leave official interest rates at a record low 0.1 per cent for a long time.

Reserve Bank governor Philip Lowe addresses the National Press Club.
RBA governor Philip Lowe has remained calm in the face of rising inflation. (Source: Getty)

Its ‘let inflation rip’ strategy was appropriate during the depths of the COVID recession, which extended the era where inflation was stubbornly below its 2 to 3 per cent target.

But now, having got inflation higher, the 0.1 per cent cash rate is no longer appropriate.

Which leads to a possible economic impasse for 2022 and into 2023 – higher wages are likely and with the economy doing well, inflation will also be elevated.

The RBA board meets next week. There should be a serious debate about the inflation and wage outlook and how long the 0.1 per cent cash rate is needed to get to full employment.

Or rather, the debate at the RBA should be about what the risks are of an inflation explosion if it leaves the cash rate at 0.1 per cent for too long.

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