Decade-high wages growth shows economy is ‘running hot’ as rates tipped to rise again

Workers are seeing wages grow at the fastest pace in almost a decade but face further pain with predictions of higher interest rates to keep inflation at bay and another 10 per cent fall in house prices.

The Reserve Bank is likely to lift the official cash rate by another quarter percentage point next month, to 3.1 per cent, as data shows the economy remains strong despite high and rising inflation and signs of a global downturn on the horizon.

Wages grew by 3.1 per cent over the year.Credit: Peter Rae

The International Monetary Fund said Australia was likely to avoid a recession but urged the central bank to keep lifting interest rates to prevent high inflation from becoming entrenched.

While an IMF report shows the Australian economy had been one of the strongest in the developed world, head of the IMF’s Australia and New Zealand division, Harald Finger, said the property market was going to keep falling for some time.

He expects a further 10 per cent fall in house prices, on top of the 5 per cent or so fall that has been experienced across capital cities.

“Even with that fall, it will still leave house prices above their pre-COVID level,” he said.

“The house price fall is going to be a wash for most people, but there’s going to be a group of people who have only recently come into the market or are highly leveraged who are going to feel the impact of higher interest rates.”

The IMF report said the central bank and government need to tighten policy further to “rebalance domestic demand”, and keep inflation expectations anchored.

Inflation, currently 7.3 per cent, is forecast by the Reserve Bank to reach 8 per cent by the end of the year. The bank has raised the official cash rate by 2.75 percentage points since May in response.

Data from the Australian Bureau of Statistics showed wages grew 3.1 per cent in the 12 months to September and are up 1 per cent over the past quarter. It is the highest quarterly growth in hourly wages since March 2012, and the highest annual growth rate since March 2013.

The quarterly growth was driven by private sector wages, which grew at twice the rate of public wages – 1.2 per cent versus 0.6 per cent, in seasonally adjusted terms.

Despite the jump in wage growth, real incomes continue to fall. Once inflation is taken into account, real wages fell by 4.2 per cent over the past year.

KPMG Senior Economist Sarah Hunter said the wages data was unlikely to surprise the central bank, and a 0.25 percentage point lift to interest rates was all but certain.

“[The Reserve Bank] has been signalling for some time that businesses in the RBA’s liaison program are reporting awarding significantly higher pay increases,” she said.

“But it will absolutely confirm the RBA’s view that the economy is running hot at the moment.”

Additional data on the unemployment rate published by the ABS on Thursday will add to the Reserve Bank’s insights into how the economy is coping with its most aggressive monetary policy tightening regime since 1994.

CommSec chief economist Craig James said the wages data showed the jobs market remained tight, and was at a point where a further fall in the rate of unemployment – currently at 3.5 per cent – would lead to faster wages growth.

“The Reserve Bank and federal government would no doubt be happy at the latest wage outcomes. Wage growth is higher, but certainly some ways away from being a ‘problem’. And of course, wages are still not keeping pace with prices,” he said.

“Now the trick is to slow down the economy, and get inflation under control, while achieving a soft landing ... holding onto job gains and allowing workers to achieve a fair rate of wage growth.”

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