Yesterday’s Wage Price Index (WPI) for the final three months of last year and 2020 as a whole contains a depressing message for the Reserve Bank: wage rises strong enough to push inflation higher will not be coming for years. That should be a wake-up call for inflation hawks pushing a rate rise next year — though it’s unlikely to interrupt their “rate rise looms” dreams.
The quarterly WPI rise of 0.6% for the December quarter released this week by the Australian Bureau of Statistics (ABS) gave an annual rate of 1.4% for 2020 (that was the second quarter in a row of 1.4%). That’s sharply lower than the 2.2% annual rate at the end of 2019 and by far the lowest year on record — wages growth bottomed out at 2.9% during the financial crisis.
There was an illusory quality to the 0.6% quarterly rise as well, given much of it was driven by the reversal of short-term wage reductions imposed by employers during lockdowns — workers were simply moving back to their pre-COVID incomes. Not exactly worth breaking out the bubbly.
In the public sector, wage freezes — which haven’t been reversed — meant public sector growth of 1.6% was the lowest ever annual result, as governments continue to deliberately undermine growth to punish public sector workers.
Sign up for a FREE 21-day trial and get Crikey straight to your inbox
While some sectors had healthy wage rises — professional services saw a quarterly rise of 1.2% — the lowest paid sector in the economy, accomodation and food services, had just 0.1% quarterly growth and just 0.3% annual growth.
The data undermines the growing number of investors, economists and fund managers peddling the illusion that inflation is going to re-emerge and force the Reserve Bank to lift interest rates later in 2022 rather than in 2024 at the earliest.
The bank’s official line continues to be that it “will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest”.
The deluded group of inflation hawks appear to have forgotten that the Reserve Bank struggled to get near its target band for years before the pandemic, despite what were then record low interest rates and sustained fiscal deficits. But, suddenly, inflation is going to surge after fiscal stimulus has ended and while many workers can’t get a pay rise no matter what.
New capital expenditure data that also came out yesterday showed the first noticeable rise in business investment since 2018, with an increase of 3%. That was good news — though hardly worth the hype the Financial Review tried to whip up around it.
The accommodation and food services sector produced a big and welcome jump in investment — 34% — though it’s still short of 2019 levels. However, the first investment estimate for 2020-21 showed a fall of 3.4% compared to the equivalent estimate for last year, so there’s little optimism looking ahead.
And overall, building and structures investment was relatively flat. That backed up separate data on the value of construction work done, also issued by the ABS, which fell by 0.9% in the December quarter to $51.17 billion, the second consecutive quarterly drop. The total value of construction work is now at the lowest level since September 2010, before the surge in resources spending under Labor. If it hadn’t been for a rise in residential construction (2.7% in the quarter, fueled by HomeBuilder-funded renovations), the drop would have been significantly worse.
That is all to say there’s still a long way to go before investment levels by both government and business start supporting strong growth. And a very long time before workers see any benefits in terms of growing wage packets. As for inflation — dream on.