The Australian Wage Price Index (WPI) for the March quarter is due to be released by the ABS at 11:30am (AEST) this morning. Wages growth had recovered to its pre-pandemic pace by the end of last year and is expected to have kept rising over the first quarter in line with the tightening labour market. Although wages growth is being outpaced by inflation, it is forecast by the RBA to rise over the next couple of years to a pace that will be putting upward pressure on prices. A stronger-than-expected rise in the WPI today would firm market expectations for a 40bps RBA rate hike in June.
As it stands | Wage Price Index
Wage pressures were broadening in the Australian labour market as the WPI lifted by 0.7% in the December quarter, its fastest quarterly rise in almost 8 years. Annual growth in the WPI firmed from 2.2% to 2.3%, in line with its pre-pandemic range (see here).
With the labour market tightening, both private and public sector wage costs increased by 0.7% in the quarter; however, annual growth was stronger in the private sector (2.4%) than in the public sector (2.1%) due to the effect of ongoing wage policies in the latter.
In the effort to retain and attract new staff, many private sector firms have turned to incentives other than raising base wages, such as offering bonuses and more flexible working conditions. Accordingly, the private sector WPI inclusive of bonuses measures accelerated by 1.2% in the quarter to an annual pace of 3%. This compares with a much more modest pace in the public sector at 0.6%q/q and 1.9%Y/Y.
By industry, the fastest acceleration in wages growth was in the hospitality sector (3.5%), with firms needing to rehire staff following reopenings from the Delta lockdowns and the easing of border closures in a tightening labour market. The retail sector (2.6%) was also facing similar pressures. Wages growth in professional services moderated in Q4 (2.5%) but had picked up sharply from the lows of the pandemic with many people changing jobs. Consistent with private sector surveys, wages growth had continued to rise in manufacturing (2.5%) amid staff shortages.
Market expectations | Wage Price Index
The median estimate is for a 0.8% increase in the WPI for the March quarter, between a tight range of forecasts from 0.7% to 0.8%. Growth in annual terms is expected to lift from 2.3% to 2.5%, which if achieved would be its fastest pace since late 2014.
What to watch | Wage Price Index
The RBA's rate hiking cycle is now underway and the Board has made clear its focus is on the evolution of wage-price dynamics. With Q1's inflation data coming in much stronger than expected, building wage pressures reported by the RBA's business liaison contacts was enough to prompt the Board to increase the cash rate target by 25bps to 0.35%. This was also the basis for the RBA to lift its forecasts for wages growth ahead of today's report; growth in the WPI is now forecast to rise to 3% by the end of the year (from 2.75%) and then to 3.5% by the end of 2023 (from 3%). In this sort of range, wages growth will be gradually adding to inflation pressures. The May meeting minutes confirmed a larger rate hike of 40bps was considered and that option remains on the table. A stronger-than-expected rise in wages growth would firm expectations for this course of action at the June meeting.
