The wages data should be stronger, but it probably won’t be.
My bet is that today, the RBA drops another rate hike on us.
I’m not totally certain though. Market economists think it’s a line-ball and could go either way, especially after last week’s weak inflation data.
But I don’t think the RBA will let that stop them. They want to know for sure that inflation is buried six-feet under, and I reckon they’ll be willing to err on the side of insurance.
One more just to be sure.
But I think they can relax.
It looks pretty clear to me that inflation is heading downwards.
And of course the big monster lurking under the RBA’s bed was always a wage-price spiral.
Nothing strikes fear into the heart of central bank economists like the idea that inflation might lead wages to break out, which in turn creates more inflation, and around and around the merry-go-round of death we go.
But I see very little chance of that happening.
To be clear, I do think wages will lift from here. But that’s only because it would be highly unusual if they didn’t.
To understand that, take a look at this chart (called the Phillips Curve). It compares labour-underutilisation (a broader measure of unemployment), and wages growth at particular moments in time in the Australian economy.
What it shows is a clear relationship. When the labour market is tighter, wages growth is higher.
That’s exactly what you expect of course. That’s what theory would tell you. When workers have more bargaining power, they bargain up their wages.
But have a look at the data point for December 2022 (which is our last read on the Wage Price Index). It’s almost an outlier.
For a labour market that tight, you really should expect wages to be growing more quickly – more like 4.5% rather than 3.5%.
So either we get another outlier in March, or wages growth will lift.
But even if we get to 4.5%, or even 5%, inflation is running at a little under 7%, so real wages are still going backwards. Workers are seeing their purchasing power eroded.
At the quickest pace in recorded history, actually:
But the flip side of that is that the Aussie economy could see wages growing 4.5%, or even higher, and it would still be putting downward pressure on inflation.
And that’s even if we get there.
The partial indicators of labour demand – like job ads – seem to have rolled over, and are heading south.
That means higher unemployment in the months ahead. That means less labour market tightness. That means less wages growth.
So I reckon we’re actually well past peak – both in terms of labour market tightness and in wages growth.
Things will simmer down from here.
And so the RBA should be looking at this, alongside the falling inflation data, and think, yep, job done gang.
Time to go home.
JG.