February 15, 2022

AMW: WPI Preview and what does sustainably higher inflation mean?

The Q3 result showed WPI wage increases broadly back to pre-pandemic patterns, and our forecast for Q4 sees an acceleration in private sector wages growth to 2.5% y/y.

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Analysis: WPI preview and what does sustainably higher inflation mean

  • WPI for Q4 is on next Wednesday (23 February) and we expect wages growth to continue to lift, increasing by 0.7% q/q and 2.4% y/y. If realised that would be the fastest quarterly rise since 2014. The Q3 result showed WPI wage increases broadly back to pre-pandemic patterns, and our forecast for Q4 sees an acceleration in private sector wages growth to 2.5% y/y, led by the 2 fifths of employees covered by individual contracts whose wages are more sensitive to labour market conditions.
  • Importantly such a figure would confirm a tighter labour market is seeing wage increase revert to and move beyond pre-pandemic and as the labour market tightens further, a further acceleration in wages is likely. Of course, the RBA’s was aiming for wages growth closer to 3% plus to sustain inflation at target, but the recent shift in rhetoric suggests the RBA could be comfortable inflation is sustainably higher sooner.
  • In this weekly, we explain the RBA’s communication on what constitutes ‘sustainably higher’ inflation, as well as previewing our WPI forecasts for next Wednesday. On defining ‘sustainably higher’ inflation, Governor Lowe noted recently: “We do not have a specific definition as to what ‘sustainably in the target range’ means. The actual rate of inflation is relevant as are the trajectory and the outlook. So too is the breadth of price increases and the factors driving them”.
  • Dr Lowe’s parliamentary testimony teased out the role of wages in this new framing of ‘sustainable’, with wages still important, but including broader measures of labour costs beyond WPI such as unit labour costs and average earnings. It is worth noting these broader labour cost measures are lagging and volatile, so a qualitative assessment based on liaison information and the evolution of labour-cost sensitive prices in the CPI is as important as individual labour cost data prints.
  • It is conceivable that the RBA can assess inflation as being sustainably at target and that labour market capacity has been absorbed, even ahead of hard data demonstrating wages growth is at 3% plus. Governor Lowe at parliamentary testimony last week revealed that the RBA’s central scenario is consistent with considering hikes “sometime later this year” even though the RBA’s central forecasts only sees Q4 WPI hitting 2¾%. That also means should the data surprise to the upside, hikes earlier in the year are conceivable with every meeting becoming live in H2 2022.
  • Other insights on the RBA’s reaction function from parliamentary testimony were: (1) the RBA is willing to be patient. Governor Lowe sees “no evidence in Australia that things are overstimulated currently” and while inflation pressures have “picked up, are not excessive.”; (2) It would take more than one CPI for the RBA to be assured on their central scenario, noting “a couple more CPIs would be good to see.” Note Q2 CPI is on 27 July. NAB’s view remains the RBA is likely to start raising rates from November.


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