Late last week, Treasurer Jim Chalmers said the “core of our economic plan is to get wages moving again”.
Doing his media rounds on Thursday, Mr Chalmers fielded several questions regarding the budget including how he planned to fix the crippling cost-of-living crisis.
And while things like child care, TAFE fees and the cost of electric vehicles (this one remains a little unclear) were said to be key, Mr Chalmers placed a lot of emphasis on getting wages moving.
“We want to get wages moving in this economy again,” the Treasurer told SkyNews.
“I think, probably the primary reason why people have felt like they’re going backwards for some time now is because their real wages are going backwards. Inflation is through the roof. Wages, which are starting to pick up a little bit, in welcome ways, are still nowhere near inflation and so people are falling backwards,” he figuratively explained.
But just hours after Mr Chalmers detailed his budget pillars, the Reserve Bank’s governor Philip Lowe took centre stage at the Anika Foundation touting a different message.
Namely, Dr Lowe was adamant that wages must never catch up to inflation. Instead, he noted, the RBA is doing everything it can to ensure inflation falls to meet wages growth.
Pointing out the contrast between wages outcomes in the US and Australia, Dr Lowe stated that, “wages growth has picked up, but not nearly to the same extent as in the United States”.
This, he explained, is an “important difference”.
“While there are some areas where wages are rising very quickly in Australia, aggregate growth in wages has not responded materially to the higher inflation and is not inconsistent with inflation returning to target over time.”
“It is important that this remains the case”, Dr Lowe added, “and that we avoid the cycle of higher inflation leading to higher wages growth and then higher inflation”.
A cycle that, he said, would end in higher interest rates and a sharper slowing in the economy.
Speaking to InvestorDaily, AMP’s chief economist shed light on what at face value would suggest Mr Chalmers and Dr Lower are at odds.
Noting that while their messaging may appear contradictory, Dr Shane Oliver explained that they are referring to slightly different things.
“Like the government, the RBA is also forecasting a pick-up in wages growth and governor Lowe in the recent past has indicated he wants to see wages growth running at ‘3 point something’ as that would be consistent with their ‘2 point something’ inflation target,” Dr Oliver said.
He said that while the governor has been arguing the case for higher wages growth for years, with inflation now taking off, Dr Lowe is warning against a scenario in which inflation expectations influence wages growth, chasing inflation higher.
“If this happens and wages growth rises to 6, 7, 8 per cent to match the rise in inflation, then business cost pressures will rise dramatically leading to a further rapid lift in prices and we will end up with the dreaded 1970s wage-price spiral,” Dr Oliver said.
“Ideally, what the RBA wants is for inflation to fall back to 2 to 3 per cent and wages growth to rise to around 3 to 4 per cent. This was where we used to be up until around 2014 and would help keep inflation from becoming too low or too high, and would mean real wage gains for workers at the same time.”
And while the messaging remains a little murky, the truth is that Mr Chalmer’s budget policies must align with Dr Lowe’s monetary policy. Namely, if Dr Lowe insists that it’s important that wages don’t shadow inflation, then the government must support him if it wants to safeguard the country’s economy.
