Real wages growth may finally be near

Wages growth will not be a problem for the RBA.

After many years where the rate of inflation has exceeded the rate of increases in wages, we are finally seeing the start of a long-awaited end to what has been a major problem for most wage earners: falling real wages.

In the June quarter, the Wage Price Index (WPI) rose 0.8 per cent, which is equal to the 0.8 per cent increase in inflation in the same period.

To be sure, this break-even on real wages is small beer after many years where price rises have exceeded wages growth – often by a large margin. But it is a welcome development and sets the scene for what is likely to be an extended period where real wages keep moving higher, albeit at a moderate pace.

The good news is that the turning point higher in real wages is coming from a combination of a sharp deceleration in inflation and a decent and sustainable lift in wages growth. This is a win-win position if it can be the new trend.

Into 2024, the quarterly dynamics are likely to see wages growth in an approximate 0.75 to 1 per cent range, with inflation in a 0.5 to 0.75 per cent range.

The tight labour market – reflected in the unemployment rate hovering near a 48-year low of 3.5 per cent and the workforce participation rate rising to a record high – has parlayed into a rise in wages growth. Demand for workers has been strong.

Increases in the minimum wage rates in July 2022 and July 2023 are also feeding into the current annual data and will feed into the September-quarter wages data when they are released in November.

Adding to the good news is the fact that the 3.6 per cent annual increase in the WPI is entirely consistent with the Reserve Bank’s (RBA) inflation target of 2-3 per cent. It could even be too low, which makes for interesting dynamics when it comes to the outlook for interest rate settings.

In other words, this means there is no evidence at all of a much over-hyped wage-price cycle – a phenomenon where excessive wage increases feed into high business costs and then into excessive inflation rates.

It simply isn’t happening.

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If the consensus of credible forecasters is correct and the unemployment rate edges up towards 4 or 4.5 per cent and bottom-line GDP per capita falls over the next year, inflation in Australia will fall to the RBA’s target. Wages growth will not be a problem for the RBA.

While it is too early to be seriously considering an interest-rate-cutting cycle from the RBA, it remains on the cards that later this year, or early next, markets will start to price in such a move. The next rounds of information on unemployment and wages – in the next three to six months – will be vital in testing that proposition.

Suffice to say, there is little chance that a sensible RBA would deliver an interest rate increase when it has already lifted interest rates too much too late in the current cycle. Another hike in the current circumstances would risk a very hard landing for the economy.

Over the next few years, real wages growth will be a feature of the Australian economy, with annual inflation falling below 3 per cent in 2024, a time when annual wages growth is set to hover around 3.75 per cent.

Consumers will be greatly relieved, and the low inflation aspect of this could hasten a long-overdue recovery in consumer sentiment and, in time, some recovery in consumer spending, which is tracking at its weakest point in more than 30 years.

 

article from: au.finance.yahoo.com