vested interests

The next couple of quarters of economic data will be crucial in what has become the great guessing game of Australian economic policy: when will wages start growing, like policymakers insist they will — and have been insisting for some time?

We’ll have to wait until next month to get the wage price index (WPI) for the September quarter, and it will need to show a lift from the rate it was stuck at for the whole of last financial year — 1.9% private sector growth — if the government’s budget forecast of 2.5% growth across public and private sectors is to be borne out.

Next Wednesday, we’ll get the September quarter consumer price index (CPI), which is widely tipped to be one of the biggest for years, thanks to the surge in electricity and gas prices. Economists from the ANZ, for example, suggest it will be a rise of 0.8% quarter on quarter, a much stronger growth rate than the 0.2% seen in the June quarter.

Westpac’s early call is for a quarter-on-quarter rise of 0.7% with around half that as a result of higher energy prices. Westpac’s rise would be equal to the one we saw in the September quarter of last year, which was also driven higher by increased energy and fuel costs. The Reserve Bank certainly expects a rise in the CPI, but perhaps not as much as some might think because of weak trading conditions in retailing is preventing a full pass through of price rises.

A rise of around 0.7 to 0.8% would see inflation of 1.9% to 2% (assuming no past revisions), equal to or faster than the current WPI growth. Like the government, the RBA is maintaining what might be called a “crossed fingers” approach to policymaking on wages — hoping it will all come good in the end. As this week’s minutes said:

“The current and prospective strength in employment growth in Australia was expected to support household spending in the period ahead, although slow growth in real wages and high levels of household debt were likely to be constraining influences. Remaining spare capacity meant that wage and price increases had been subdued. Wage growth was expected to increase gradually as spare capacity in the labour market diminished, which was in turn expected to contribute to a gradual rise in inflation over time.”

The RBA will be buoyed by the continued strong growth in employment yesterday’s September jobs figures showed. But we’ve had strong employment growth now for some time without any wages growth. The RBA can’t keep saying “gradually” when the needle isn’t shifting on WPI. And others are less sanguine.

This week, the Commonwealth Bank’s chief economist suggested we needed to return to the days of a wages policy to address persistent stagnant wages — and that we were already part way there due to the growing proportion of the workforce on the minimum wage. That’s why the RBA and the government will be holding their breath when the next WPI number comes out and scanning it for signs that there’s a pickup in growth beyond that occasioned by this year’s minimum wage rise mandated by the Fair Work Commission. And all the more so if electricity prices drive inflation up higher than expected.