Wages ahead of prices…just

Wage price index

• Slow wage growth: The wage price index rose by 0.6 per cent in the September quarter after a 0.6 per cent rise in the June quarter. Annual wage growth eased from 2.27 per cent to a record (18-year) low of 2.26 per cent.
• Real wages: Wage growth exceeds headline inflation by 0.8 percentage points.
• Industry with fastest annual wage growth: Education & training (up 3.0 per cent).
• Industries with slowest annual wage growth: Professional, scientific and technical services and Administrative and support services (both up 1.5 per cent).

What does it all mean?

• The Reserve Bank can scratch wage growth from its “wall of worry”. It’s not an issue at present. Certainly not a concern in terms of inflationary pressures. That means that inflation is likely to remain low, giving the Reserve Bank scope to cut rates should it become necessary.
• The good news is that another rate cut is certainly not necessary at present with car sales, building approvals and tourism arrivals all at record highs and with annual employment growth the fastest in 7½ years.
• Clearly, the job market is improving because the cost of labour has become more affordable for businesses.
• While low wage growth is good for keeping costs down for businesses, modest real wage growth (wages less prices) makes it more difficult for consumer-focussed businesses.
• Real wage growth remains positive – around 0.8 percentage points if judged against “headline” inflation (15-year average 0.7 percentage points) and around 0.2 percentage points when judged against “underlying” inflation.

What do the figures show?

• The wage price index rose by 0.6 per cent in the September quarter after a 0.6 per cent rise in the June quarter. Annual wage growth eased from 2.27 per cent to a record (18-year) low of 2.26 per cent.
• Private sector wages rose by 0.5 per cent in the quarter while public sector wages rose by 0.7 per cent. Annual growth of private sector wages fell from 2.2 per cent in the June quarter to a record low of 2.1 per cent in the September quarter. Public sector wage growth rose from 2.6 per cent to 2.7 per cent in the September quarter – equalling the fastest rate in 18 months.
• Including bonuses, wages rose by 1.0 per cent in original terms in the September quarter to be up 2.3 per cent on a year ago – a record low. Private sector wages including bonuses rose by 0.9 per cent in the quarter to be up 2.2 per cent on a year ago (or up 2.3 per cent at a total hourly rate).
• Industries with fastest annual wage growth: Education & training (up 3.0 per cent) followed by Financial and insurance services (up 2.7 per cent) and Manufacturing and Healthcare & social assistance (both up 2.6 per cent).
• Industries with slowest annual wage growth: Professional, scientific and technical services and Administrative and support services (both up 1.5 per cent) and Construction (up 1.7 per cent).
• Annual wage growth across States & Territories: NSW, 2.2 per cent; Victoria, 2.6 per cent; Queensland, 2.0 per cent; South Australia, 2.3 per cent; Western Australia, 2.0 per cent; Tasmania, 2.3 per cent; Northern Territory, 2.4 per cent; and ACT, 1.6 per cent.

What is the importance of the economic data?

• The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).

What are the implications for interest rates and investors?

• Low wage growth keeps the door open for lower interest rates if needed to boost growth.
• CommSec expects no change to interest rate settings over the next year.
• While real wage growth is only modestly above “normal” levels, home prices are rising in many regions and low prices for “essential” goods like petrol gives scope for spending on discretionary items. Retailers must remain competitive in such an environment and that means keeping costs restrained.