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Room for optimism, but wages may not be as benign as they seem

• WPI data last week showed wages growth of 0.8% q/q. Despite annualising at ‘just’ 3.4% in Q1, we do not see the result as a meaningful downside surprise to official forecasts for wages growth to peak at 4.0% y/y. In our view risks remain on the outlook for base wage growth, and also on its consistency with inflation returning to target.
• In this Weekly, we delve into last week’s WPI data in more detail and show that shifts in seasonal patterns of wage increases could mean private sector wages growth was understated in the official data by as much as one third. Shifting seasonals could conversely support Q3, which would add to an already high print on the back of the minimum/award wage decision taking effect and change to pay for aged care workers.
• More broadly, given the WPI outcome, we think the RBA can continue to assert that base wages growth in Australia is different to offshore – (in 6m-annualised terms private wages growth in Australia is 3.6% vs. NZ 4.2% vs. US 4.8%). Compared to what would be expected in a Phillip’s curve framework, wages also haven’t incorporated much additional compensation for realised inflation, but rather are broadly consistent with the tightness seen in the labour market to date.
• While the above analysis sounds hopeful, it is also true that services inflation may yet prove sticky in Australia. While wages remains an important determinant of inflation over time, non-wage drivers have been much more important so far this cycle. According to the recent RBA Review, the RBA was overly focussed on wages and paid too little attention to risks posed by non-wage sources of inflation back in 2021. The RBA has also appeared to be highly reactive to wages data over the past 6 months.
• Optimism on base-wages needs to be tempered by the large productivity caveat the RBA has only recently started to highlight alongside in its view that wages growth is consistent with a return to at-target inflation (“a rise in productivity growth would be needed to ensure consistency of the wages growth forecast with the Bank’s inflation target”). Poor productivity growth in 2022 is notable given unit labour cost growth was higher in Australia than in most other advanced economies despite slower base wages growth.
• NAB expects the RBA cannot yet be comfortable that the current cash rate of 3.85% is sufficiently restrictive, and we expect another hike by August and do not rule out a further increase to 4.35%.

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