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Federal

Jul 22, 2015

Stronger CPI result suggests real wage drop

A slightly stronger CPI result won't trouble the Reserve Bank but means workers are continuing to look at declining real wages, Glenn Dyer and Bernard Keane write.

As expected, inflation picked up a little in the June quarter, but the rise will again underline the problems for the government on the revenue side with very weak growth in real wages.

The Australian Bureau of Statistics said this morning that the Consumer Price Index (CPI) rose 0.7% in the June quarter 2015, following a rise of 0.2% in the March quarter 2015. The CPI rose 1.5% through the year to the June quarter, following a rise of 1.3% in the year to the March quarter 2015.

Automotive fuel (an expected rise, up 12.2%), medical and hospital services (up 4.5%) and new dwelling purchase by owner — occupiers (up 1.5%) were the most significant rises, with the rise in the cost of fuel “the largest since December 1990”, according to the bureau. But don’t be too concerned — that came after a big fall in the preceding three quarters, including a 12.2% fall in the March quarter, so were only back to where we were at the end of 2014. Domestic holiday travel and accommodation were down (5.4%) as were pharmaceutical products (down 1.8%), while the closely watched Banana Index showed the cost of fruit fell 8%.

The headline CPI readings don’t matter as much as the weighted mean and trimmed median — and these showed no real change; in fact, if anything, they were a touch weaker. The quarter-on-quarter rise averaged out at 0.55% (compared to 0.6% in the March quarter) and the average yearly rate was unchanged at 2.3%, which is of no concern to the Reserve Bank.

Where the wage issue comes in is that the 0.7% quarterly CPI rise will almost certainly be higher than the expected rise in the wage price index from the ABS (due next month) which had a rise of 0.5% in the three months to March, although the annual rate of 1.5% will still be slower than the 2.5% annual growth rate in wages, according to the March quarter index figures.

But unless there is another downturn in oil prices in the next year (a possibility, with Iran yet to release up to a million barrels of day of extra production if the nuclear deal with the six major Western countries, led by the US, is approved), inflation is expected to gradually drift higher as the impact of the weakening Aussie dollar takes hold. That is going to put further pressure on real wages and, maybe, help perpetuate the generally tepid state of the domestic economy, outside housing — although that sector is under pressure from the rising cost of materials.

On the positive side, that sluggish growth in wages has undoubtedly helped keep the labour market a bit stronger than expected, meaning tax revenues will be a little better. But the prolonged weakness in real wages is affecting household consumption and coming uncomfortably at a time of rising household debt. For the moment, that is being underpinned by rising house prices in Sydney (where headline was highest, at 0.9%) and Melbourne, but that won’t last forever.

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4 comments

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4 thoughts on “Stronger CPI result suggests real wage drop

  1. bushby jane

    I don’t understand why the govt is expected to collect more from bracket creep if wages won’t be increasing by much.

  2. shea mcduff

    “On the positive side, that sluggish growth in wages …”
    Its a strange mind that has as its mind set that ‘sluggish growth in wages” is a positive.
    Even with the rest of the sentence.

  3. AR

    Shea – perhaps it’s the same mindset that wants workers on $2 pd? Those damned plebs will insist on eating and having a roof.

  4. shea mcduff

    AR
    Yep, got it in one.
    Keane and Dyer can write some good stuff, and the article above is not too bad and probably better than its average MSM cousins, but that one little line I referenced shows that they are captive to the corporate and press gallery mindset.