Australia's Wage Price Index (WPI) for the December quarter is scheduled to be published by the ABS today at 11:30am (AEDT). Aggregate wages growth picked up in Q3 to a little above 2% but was still only around the slow rates that prevailed before the pandemic. A material post-lockdown tightening in the labour market likely increased wage pressures over Q4, though whether that is sufficient to sustain aggressive RBA rate hike expectations remains to be seen as the Board continues to reiterate its patience in assessing Australia's wage and inflation dynamics.
As it stands | Wage Price Index
The WPI met expectations rising by 0.6% in the September quarter, lifting annual growth from 1.7% to 2.2% and returning to its pre-pandemic pace. The fading of pandemic-related headwinds drove the rise in wages growth: the share of employers conducting salary reviews in the quarter was more in line with historical patterns and due to the very low increase from Q3 2020 falling out of the annual calculation.
Reflecting a tightening labour market, growth in the private sector WPI was 0.6% in the quarter, taking the annual rate up to 2.4%, its fastest in nearly 7 years. Contributing strongly to this increase in Q3 was the effect of many workers on individual agreements receiving pay rises. The public sector WPI, held back by wage freezes and caps, lifted by 0.5% in Q4 and was at a more muted 1.7% annual pace.
From an industry perspective, the strongest upward pressure on wages growth was limited to a few industries and was generally where labour shortages were evident. This included professional services (3.4%Y/Y), construction (2.6%Y/Y) and accommodation and food services (2.5%Y/Y). Next strongest was administration (2.3%Y/Y).
Market expectations | Wage Price Index
The headline WPI is expected to increase by 0.7% in the December quarter, around a range of estimates from 0.6% to 1%. Annual growth is forecast to firm from 2.2% to 2.4%; however, it should be noted that a 0.7% quarterly rise would actually generate annual growth of 2.3%, not 2.4%. Referring to the RBA's February Statement on Monetary Policy, the Bank's implied forecasts for wages growth in Q4 are a touch softer than the market at around 0.6%q/q and 2.3%Y/Y.
What to watch | Wage Price Index
With inflation back at the midpoint of the RBA's target band for the first time since 2014 and the unemployment rate falling to a 13-year low, markets have moved to price in the first RBA rate hike by June, with a further 100bps of hikes anticipated by the end of the year. This profile looks overdone and could be at risk of being pared back unless there is a strong upside surprise in the Q4 WPI.
The RBA continues to point out it is taking a "patient" approach, highlighting that although it has had to revise up its inflation forecasts, price pressures are mostly reflecting pandemic-related supply issues. Beyond these effects, the RBA has referred to wages growth of above 3% as a guidepost to the sustainability of delivering on the 2-3% inflation mandate.
That confirmation in terms of aggregate wages may take some time to materialise as the WPI is a relatively slow-moving gauge and is currently affected by the wage policies in the public sector, years-long enterprise bargaining agreements and annual reviews of the minimum wage. But a tight labour market is creating a lot of churn beneath the surface as people switch jobs and receive promotions, which will be leading to higher wages. All in all, today's WPI should give a broad insight into the extent of wage pressures currently being faced by Australian employers as the labour market tightens.