Preview -- Wage Price Index (Q1)

Today at 11:30am (AEST) the ABS is scheduled to release its Wage Price Index (WPI) data for Q1. The WPI measures changes in wages and salaries paid by employers for a fixed basket of jobs, unaffected by compositional changes such as hours worked. Strengthening labour market conditions over the past year or so has helped to lift the pace of growth in the WPI, though it continues to remain low and has been a key factor in restraining growth in household disposable income. Q4's National Accounts showed growth in household consumption -- the largest component of the domestic economy -- slowed sharply over the second half of 2018 with slow income growth a major headwind.    

As it stands | Wage Price Index 

Headline growth in the WPI lifted by 0.54% in Q4, which came in a touch below the expected outcome of 0.6%. Annual growth was broadly unchanged at 2.27%. Growth in public sector wage costs continued to lead the headline index, increasing by 0.6% in the quarter and by 2.53% through the year. Positively, private sector wages lifted by 0.62% in Q4 to drive the annual pace to its highest in 4 years at 2.29%.  

Growth in the WPI including bonuses lifted from 2.67% to 2.81% in annual terms to Q4. Annual private sector wage growth inclusive of bonuses lifted from 2.69% to 2.75% in contrast with a slowing in the public sector from 2.63% to 2.53%. 

Market expectations | Wage Price Index

For today's release, the market expectation according to Bloomberg data implies a steady outcome of 0.6% in the quarter and 2.3% for the year. The pace of wages growth has been lifting -- albeit gradually -- as conditions in the labour market have tightened. Over the past 12 months, the unemployment rate has declined from 5.5% to 5.0%, while the underemployment (from 8.5% to 8.2%) and underutilisation rates (from 14.0% to 13.2%) have also moved lower. RBA analysis indicates that around 40% of workers are covered by individual agreements, which tend to be more responsive to changes in labour market conditions than other wage-setting methods, while the prevalence of wage freezes has also diminished relative to 12 months ago. The minimum wage rise of 3.5% for 2018 took effect from Q3 of that year so it will continue to provide a boost to today's numbers.  

What to watch | Wage Price Index

The trend is your friend. Policymakers at the RBA and in Canberra will be wanting to see WPI growth continuing on its upward trajectory to give confidence that spare capacity in the labour market is gradually eroding. The RBA in its Statement on Monetary Policy for May forecast wages growth to rise to 2.5% in 2019 and 2020, while April's Federal Budget contained forecasts for growth of 2.5% by mid-2019 rising to 2.75% by mid-2020. Also, after Q1's inflation data came in much slower than expected (see here), look for real growth in the WPI to receive a boost today.