RBA gets real, wages now the key

RBA’s forecasts are that wage rises across the economy will remain relatively subdued.

Good. Reserve Bank governor Philip Lowe and his board have stepped back from shredding their credibility by delivering the “larger than normal” rate hike that they wimped out of doing a month ago.

This was an explicit ‘better late than never’ statement that they now – finally? determinedly? - took our serious inflation problem seriously, if not yet urgently. We’ll have to see on that.

But there was still, though, a concerning air of almost Candidean ‘best of all possible worlds’ unreality in the RBA belief that inflation will gently subside – heck, plunge - as we go through 2023 and into 2024.

Yes, that optimism does factor in further, and in the current context quite significant rate rises from the RBA itself.

But it also crucially assumes there is no significant wage inflation – threatening a dreaded wages-prices spiral - despite the record low jobless rate and huge worker demand right across the economy, in the context of our current surging inflation.

What, workers have real bargaining power for the first time since at least the GFC in 2008, and indeed arguably this century?

And they are not going to demand wage increases to at least keep up with inflation which will reach 7 per cent for this financial year, when the ABS issues the figures at the end of July?

Is it because the RBA believes immigration will surge back quickly to the 250,000 annual levels of pre-Covid?

Which would be great for businesses desperate for workers; but cripple the chances of real wage rises or even inflation-matching increases?

Yes, Lowe did note the evidence that “larger wage increases are now occurring in many private-sector firms”.

But the RBA’s forecasts are that wage rises across the economy will remain relatively subdued and significantly below the inflation rate.

Those forecasts, a month ago, had the WPI (wage price index) up only 3.3 per cent this year, rising just 3.5 per cent next year.

RBA’s forecasts are that wage rises across the economy will remain relatively subdued.

This despite the jobless rate falling even further, immigration or no immigration, to an even tighter 3.6 per cent and inflation coming in at 5.9 per cent for 2022 and then plunging to only 3.1 per cent in 2023.

Is Lowe serious? What colour Kool-Aid, what variety of dope, has he been feeding into the RBA computer?

Does he really think workers are going to cop 3.3 per cent wage rises when inflation is 6 per cent?

And, that’s on the RBA’s forecasts.

In fact inflation is going to continue to ‘surprise’ the RBA; it will be higher than 6 per cent this year; it will be higher than 3 per cent in 2023.

There was one huge, damming, omission from Lowe’s statement. That was the government’s explicit endorsement of a 5.1 per cent minimum wage rise.

Again, does Lowe really think the lowest paid workers can get 5.1 per cent and better-paid workers with bargaining power are going to cop just 3 per cent?

In all this, it’s important to understand two things.

As I’ve articulated over the years, the RBA will do its job, even if like this year it only discovered what that is belatedly.

Secondly, ‘the world’ is far more complicated, volatile and unpredictable than it’s ever been.

All the ‘bad stuff’ left to fester since the GFC – and indeed worsened, kicked down the road, by central banks cutting rates to zero and printing trillions - is now bubbling up.

Plus Covid. Plus Ukraine – both the immediate oil, gas and food inflation impacts, joined with energy shortages thanks to our anti-fossil fuel insanity – plus an imploding China.

Put the two together and ignore the ‘forecasts’ of what the cash rate will get to next year. The RBA will, sensibly, play it month-to-month; after not-so sensibly starting late.