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Wages and the risks – Could higher wages push the RBA even further?

• In this Weekly we look at the wages outlook ahead of the WPI tomorrow, and how the RBA may react to a higher-than-expected print; we expect WPI to print at 1.0% q/q and 3.5% y/y (the RBA SoMP has a forecast of 3.5% y/y). The RBA has already noted that price-wage persistence and the risks of a shift in wage and price setting behaviour could see the economy “knocked off that narrow path” to a soft landing, so Wednesday’s wages data will be watched closely.
• The RBA forecasts wages growth to hit 4.2% y/y in 2023, before stabilising to 3.8% by mid-2025, with core inflation only expected to be 2.9% y/y by mid-2025. Wages growth sustaining above 4% is unlikely to be consistent with inflation returning to the 2-3% target, while acceleration well beyond that level would also likely cause the RBA to question their assessment that “wages growth remained lower here than elsewhere”. A higher-than-expected print would thus see markets lift their terminal rate pricing for the RBA.
• As for current developments, wages growth is not low relative to history, nor to that seen offshore. Private wages growth in Q3 in quarterly annualised terms was already around mining boom peaks being the second highest since data began in 1997, even as public sector wages continued to lag. If Q4 WPI prints as expected, it would be on par with that being seen in the US.  Broader measures of employee compensation such as total employee compensation which includes non-base wage payments and employment growth has been on par with the US.
• Governor Lowe said last week that “at the moment wage outcomes are not inconsistent with inflation returning to target in a fairly painless way.” Implicitly, the RBA thinks the labour market is less wage inflationary now than late last year even as it remains supportive of higher wages growth. That is a view we broadly share, but in terms of the risks, Governor Lowe added “Let’s hope it stays that way. ” A further acceleration in wages could push the RBA to move deeper into restrictive territory to be able to forecast a more material softening in the labour market. Yesterday’s Minutes make clear the RBA’s priority is inflation. While the Board is seeking to return inflation to target while keeping the economy on an ‘even keel’ it will do what is necessary to return inflation to target. The wages backdrop is a key risk.

Chart 1: AU wages growth has caught up to others

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