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Slower-than-expected wages growth adds to the case for another rate pause

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The latest wages price index undershot the expectations of the RBA and the market.

The wage price index (WPI) rose by 0.8 per cent in the June quarter to be 3.6 per cent higher over the year, according to data published by the Australian Bureau of Statistics (ABS) on Tuesday.

The result was below the forecasts of the Reserve Bank of Australia (RBA) as well as the expectations of the market, which anticipated that the June quarter WPI would depict a lift of 0.9 per cent quarter-on-quarter (q/q) and 3.7 per cent year-on-year (y/y).

Michelle Marquardt, head of prices statistics at the ABS, noted this was the third consecutive quarter in which the WPI has increased by 0.8 per cent q/q.

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“Compared to a year ago, fewer jobs had wage increases this quarter, however, on average, the increases received were higher. In particular, the share of jobs which received increases above 3 per cent was the highest for a June quarter since 2012,” she said.

Private sector wages rose by 0.8 per cent q/q and 3.8 per cent y/y, in line with the annual increase seen in the March quarter. Meanwhile, public sector wages rose by 0.7 per cent q/q and 3.1 per cent y/y, the highest annual rate of growth since the March quarter of 2013.

In its August meeting minutes also published on Tuesday, the RBA board said the WPI was forecast to increase in the second half of this year due to the ongoing tightness of the labour market, increases in award and minimum wages, and developments in public sector wages.

“Importantly, however, the forecasts were predicated on labour productivity growth returning to its pre-pandemic trend over coming years, which would be needed for the expected growth in labour costs to be consistent with the inflation target,” the central bank added.

Wages growth also factored into discussions at the latest board meeting on the possibility that inflation does not return to the 2–3 per cent target band by 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,” they said.

“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.”

ANZ head of Australian economics Adam Boyton said the June quarter WPI did not change the big four bank’s prediction that the RBA is now on an “extended pause”, albeit with some risk of additional tightening later this year or early next year.

“Beyond next quarter, it would appear likely that the risks remain skewed toward some (modest) pick-up in underlying wages growth given recent public sector negotiations and recently concluded enterprise bargains,” he stated.

Meanwhile, Commonwealth Bank economist Stephen Wu said the softer wages data confirmed that the labour market had been loosening for some time.

“The unemployment rate of 3.5 per cent in June, near a 50-year low, is understating the amount of spare capacity in the labour market,” he suggested.

“We have seen a big increase in labour supply in the form of record-high participation, stronger growth in hours worked, and a big lift in net overseas migration. That has met strong labour demand over the pandemic, but that demand has been declining since late last year.”

Like ANZ, CBA’s forecast that the cash rate will hold at 4.10 per cent also remained unchanged.

Slower-than-expected wages growth adds to the case for another rate pause

The latest wages price index undershot the expectations of the RBA and the market.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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