Wages may not drive inflation for some time: RBA’s Guy Debelle

The RBA’s Guy Debelle has aired concerns that wage growth will remain weak even as the economy nears full employment.

Guy Debelle, Deputy Governor of the Reserve Bank of Australia. (AAP Image/Morgan Sette)

Australia may eventually suffer the global phenomenon of slow wage growth in a tight labor market, the central bank’s deputy governor said Thursday, a comment that suggests inflationary pressure from pay checks may remain weak for some time.

“We will be alert to the possibility that these developments we see in other labor markets, in terms of subdued inflation in the face of minimal spare capacity, could occur here too,” said Guy Debelle, deputy governor of the Reserve Bank of Australia.

The comments highlight fears at the RBA that inflation, which continues to undershoot expectations, could remain benign even as Australia pushes toward full employment.

The RBA has estimated that an unemployment rate of around 5.0 per cent would be consistent with full employment and rising inflation. Unemployment stood at 5.5 per cent in September, having nudged lower since the start of the year.

“Here in Australia, our assessment is that there still remains a sizeable degree of spare capacity in the labor market, Mr Debelle said, adding that the spare capacity would gradually fall as the economy grew.

While Mr Debelle said the laws of supply and demand would ultimately force employers to offer higher wages to attract workers, he left open the possibility that there could be a time lag before that happens, even with full employment.

The comments follow the release Wednesday of inflation figures showing price growth in the third quarter was slower from a year earlier than it was in the second quarter. The data also showed both core and headline inflation remain well short of the RBA’s 2-3 per cent inflation target.

Mr Debelle also flagged a reweighting of the consumer price index by the Australian Bureau of Statistics in the fourth quarter that could weigh heavily on inflation.

History suggests that inflation has been overstated by an average of 0.25 percentage point in the period between reweightings of the CPI, Mr Debelle added.

“While we are aware of this bias, we are not able to be precise about its magnitude until the new expenditure shares are published, because past reweightings are not necessarily a good guide,” he added.

The Australian dollar dropped below US76 cents following the RBA official’s comments, touching levels not seen since mid-July before retracing its fall. The dollar dipped as far as US76.80c and as of 7.34pm (AEDT) was trading at US76.91c.

Dow Jones Newswires