Wage growth inches upwards, market waits for RBA’s response

The Australian Bureau of Statistics (ABS) has released its latest wage price index (WPI) data, revealing wages were up by 0.7 per cent for the second consecutive quarter, during the three months to March.

For the year to March, wage growth was 2.4 per cent, slightly higher than the 2.3 per cent seen in the previous quarter, but nevertheless, the highest annual rate recorded since December 2018.

Michelle Marquardt, head of prices statistics at the ABS commented the annual rate of growth had crept up for each of the last five quarters, from a low of 1.4 per cent in the December quarter, 2020.

Pay raises in the private sector had been the main driver of growth, mostly dominated by regular annual wage and salary review, while a small number had been to retain and attract in-demand skilled workers.

Private wages were up by 0.7 per cent over the quarter, and rising annually by 2.4 per cent – in contrast to a 0.6 per cent quarterly rise for public sector wages, which were up by 2.2 per cent from the year before.

The Reserve Bank of Australia (RBA) has indicated the wages data was going to be key to its decision-making around the cash rate. Previously, it considered that annual wages growth of at least 3 per cent would be necessary to sustain its target inflation range of 2-3 per cent.

It had considered waiting for Wednesday’s (18 May) WPI update before raising the rate, but its own liaison program with private firms indicated that more companies were needing to pay higher wages to attract and retain staff.

Inflation had also accelerated far ahead of the RBA’s target range, surging to 5.1 per cent for the year to March, while underlying inflation reached 3.7 per cent.

“Members agreed that the condition the board had set to increase the cash rate had been met,” the RBA stated in its May monetary policy meeting minutes, released on Tuesday (17 May).

“They also agreed that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time.

“In making its decisions, the board agreed that it will continue to be guided by the evidence on both inflation and the labour market, while noting that significant uncertainties remain.”

The RBA’s own forecasts placed the WPI at around 3 per cent by the end of the year.

The central bank has also predicted that the WPI will reach around 3.75 per cent by mid-2024, the fastest pace of growth since 2012.

AMP senior economist Diana Mousina stated the March wages growth was in line with the RBA’s forecasts and it doesn’t change her expectations for RBA rate movements.

“We think a 40bp rise in the cash rate is likely at the June meeting (although wages data wasn’t shockingly high, the RBA appear to want to get on top of high inflation and expect wages to continue rising based on their liaison program) and see the cash rate ending the year somewhere between 1.5 to 2 per cent, depending on how the economy responds to the first few rate rises,” she wrote.

“We see wages growth rising towards 3.5 per cent by the end of the year because of the big fall in labour underutilisation over the past 2.5 years as employment growth has been so strong.”

The ABS also reported the average size of private-sector hourly wage rises increased to 3.4 per cent, the highest quarter increase since June 2014.

The proportion of jobs recording the raises (15 per cent) had returned to pre-pandemic levels, after it was slightly higher through the March quarter last year.

But as Ms Marquardt explained, the March 2021 quarter had been “affected by the staggered implementation of award wage increases following the Fair Work Commission’s Annual Wage Review 2019-20”.

NSW, Victoria, South Australia and Tasmania all recorded the highest quarterly rates of wage growth, at 0.6 per cent.

Tasmania also topped annual wage growth alongside the ACT, with a yearly rate of 2.8 per cent.

The Northern Territory however had the slowest rates of growth with 0.3 per cent for the quarter and 1.9 per cent for the year to March.

The RBA also revealed on Tuesday (17 May) that it had considered a 40-bp cash rate rise in May, instead of the 25-bp increase that transpired.

[Related: RBA considered 40-bp cash rate rise]