Things are getting better, but it’s still a pretty slow road to rate hikes
One of the pivotal economic questions right now is what’s going to happen to wages.
In a lot of ways, wages are the number one factor influencing interest rates.
The RBA has told us that unless they see real and meaningful inflation, they’re not going to start raising interest rates.
And they also reckon that unless they see real and meaningful increases in wages, we’re not going to see any real and meaningful inflation.
So wages are the key.
And what’s happening with wages?
They’re not going anywhere.
We got the wages data last week and the Wage Price Index (WPI) is growing at 1.5% over the year.
That’s not much. When you remember that inflation is currently 1.2%, we’re talking real wages growth of just 0.3%.
That’s better than a, although is not statistically different from a poke in the eye with a burnt stick.
At any rate, wages are picking up, and if you annualised the past six months, you get annual growth of 2.0%. Again, that’s not all that much, but it is showing some signs of acceleration.
Some economists expect this to continue. The CBA in particular expects wages to keep growing strongly, and much more strongly than the RBA currently forecasts.
Even on CBA’s bullish scenario, wages are only getting back towards 3% by the end of 2023 – which isn’t all that much.
The recent labour force data gives us a little encouragement, but again, only a little.
The unemployment rate fell to 5.5% in April, but that was on the back of a fall in the participation rate offsetting an actual fall in employment.
Still, it’s not worth focussing on the monthly data in too much detail. It’s choppy. But suffice to say, we’re moving in the right direction still, albeit slowly.
Importantly, the underemployment rate, which is arguably a better guage of economic conditions given how tight the ABS’ definition of ‘unemployment actually is, has improved dramatically in recent months.
It’s now the best its been since 2014.
Now, here’s something a little fancy. When you add the unemployment and underemployment rates together you get something called ‘the underutilisation rate’. This broad measure of labour market slack is highly correlated with wage outcomes.
So we’ve seen a big improvement in underutilisation, which is consistent with growing wages pressure.
However, at its currently level, it only points to wages growth of somewhere around 2.25% – which is better, but still not enough to create the inflation the RBA is looking for.
(You probably need something in the mid-3s at least.
So that’s where we’re at.
Yes the labour market is improving. Yes, wages growth is moving in the right direction.
But it’s still a very tame affair.
And that means that any prospect of a rate hike is miles off. It’ll be years at least.
For now, the wages outlook gives us comfort that interest rates will remain low for a lot longer yet.