Treasurer, RBA at odds on real wages role

Wages growth in Western Australia has outpaced other states and territories, according to the latest data from the Australian Bureau of Statistics.

WA recorded a 4.2 per cent increase in the wage price index over the year to June 30.

With the high cost of living still very much an issue for households and businesses, the key question is whether wages growth will lead to a wage-price spiral.

In such a spiral, employees bargain for higher wages to compensate for the impact of higher inflation, which in turn leads to an increase in costs to businesses that fuels inflation.

This is unlikely to be the case in WA given the increase in WPI (4.2 per cent) is less than the increase in the inflation rate (4.9 per cent) for the same quarter.

It is worth noting private sector wages in the state have grown by 4.3 per cent, compared with 3.5 per cent for public sector wages growth over the same period.

Whether the higher wages costs impact on the bottom line for businesses depends on the extent to which rising wages, as well as other costs, are passed on to consumers in the form of higher prices or borne by businesses.

Although the increase in the nominal wage price index implies an increase in costs to WA businesses, this is less likely to be an issue since real wages (nominal wages, minus inflation) are still negative.

Nationally, the growth in WPI has slowed from 3.7 per cent in the March quarter to 3.6 per cent in the June quarter, which suggests the Reserve Bank of Australia is likely to keep the official cash rate on hold at 4.1 per cent for an extended period.

This suggests a lower downside risk of a wage-price spiral, which means WA workers will retain more of the benefit from recent wage increases.

Growth rates of seasonally adjusted wage price index (YoY percentage change).

Three of the big four banks, Westpac, CBA and ANZ, believe the interest rate cycle has reached a peak.

They predict the Reserve Bank will pause until next year, with anticipated rate cuts expected at some point in 2024.

If these expectations hold true, it will deliver some relief for WA’s mortgage holders.

An increase in wages growth coupled with a decline in the inflation rate in the June quarter represents an improvement in the value of wages for WA workers, which will help to offset the effect of the rise in inflation and interest rates.

But there is something of an inconsistency in approach between the government and the RBA when it comes to wages growth.

Federal Treasurer Jim Chalmers put wages growth at the centre of the government’s economic plan to tackle cost-of-living pressures.

Yet the minutes from the most recent Reserve Bank board meeting last month noted inflation would fall more rapidly if wages were to grow at a slower pace than prices.

This does not rule out the option of a further tightening of monetary policy to ensure inflation returns to the target 2 to 3 per cent range.

But the RBA should resist this temptation.

A further interest rate increase is not the best course of policy action and would instead lead to a further strain on household budgets and create a risk of recession.

• Dr Abebe Hailemariam is a Research Fellow with the Bankwest Curtin Economics Centre