Stephen Miller
The wage price index (WPI) won’t move the dial for the Reserve Bank of Australia’s (RBA) Monetary Policy Board (MPB).
It is fair to say that at the margin the WPI report might have allayed any nascent concern of “tightness” in the labour market, but not in a way that would ease the real anxiety around “last mile” complications in getting inflation back to the middle of the target two to three per cent range.
Those “last mile” concerns were laid bare by the September quarter consumer price index (CPI). That CPI report together with a reasonably benign October labour force report last week ensure that rate cuts will not be back on the agenda until sometime in 2026.
So even if the September quarter WPI does not point to the same degree of tightness or cost pressures evident in other data, the RBA will likely remain focused on broader measures of wage costs that point to more intense pressure, such as the national accounts-based measures of average earnings and, more importantly, unit labour costs. The latter are the most important labour cost gauge of inflationary pressures and while that measure continues to run at five per cent per annum, inflation pressures remain latent.
Wage increases are digestible in times of reasonable productivity growth. However, productivity growth in Australia remains abjectly poor, reflecting, inter alia, the lack of application (for some time and at all levels of government) to structural policies that enhance economic flexibility.
The RBA minutes released this week emphasise the “data dependence” of the RBA. In other words, like all of us, the RBA doesn’t appear to have a particularly strong view about the next move in the policy rate, let alone when that might occur. Indeed, in her press conference on 4th November following the most recent RBA MPB meeting the Governor noted that it was an “interesting question” whether there were more policy rate reductions to come.
I think the public expression of such uncertainty is appropriate. Markets understandably crave certainty but are often unfairly critical of a central bank that is simply not in a position to provide that certainty. Indeed, attempts at forward guidance from the RBA have not been replete with success.
Yes, the RBA does have greater resources (and hopefully acuity) to conjecture on the domestic economy, but it is not desirable during times of uncertainty to be dogmatic about the likely course of economic developments and it is remiss of any central bank to downplay uncertainty, particularly when, as is the case currently, those uncertainties are particularly pronounced.
That said, I continue to believe, without a great deal of conviction, that the rate cutting cycle may have a bit to run yet.
Those “last mile” inflation complications currently attaching to the RBA’s uncertainty and local financial market’s reticence to contemplate with any confidence a further policy rate cut in the first half of 2026 may yet be worn down, even if, those complications are not all (or much) of the RBA’s doing, nor within the RBA’s remit to finely tune.
There is arguably an emergent fragility in the labour market as non-market sector employment growth diminishes without market (or private sector) employment picking up the slack.
There are too ongoing fears of diminishing global growth in the wake of ongoing trade frictions and growing volatility in global financial markets. Those global growth concerns have been present for some time without being manifest in the data. I worry that the lack – hitherto – of a pothole in the road doesn’t mean that the surface remains benign.
Let’s hope the RBA has eyes peeled for the right signposts on that road.
UK CPI: a sliver or more
As in most “Anglo” economies, UK inflation remains elevates and “sticky”. Having said that, possibly reflecting elevated inflation expectations, there have been marginal downside surprises in September and October.
At the most recent Bank of England (BoE) Monetary Policy Committee meeting the vote was 5-4 in favour of keeping the policy rate unchanged. Governor Andrew Bailey sided with the majority but has said that if he sees evidence of further declines in inflation then he believes the BoE may be in a position to cut the policy rate at some stage.
Core inflation was up 3.4 per cent over the year to October from 3.5 per cent in September. Services inflation came in below BoE expectations at 4.5 per cent and while still elevated is on a reasonably clear downward trajectory. Wage growth has been a little softer accompanied by a meaningful increase in the unemployment rate to 5 per cent from 4.6 per cent since August.
That all adds up to a sliver (or something more) of a case to made for a policy rate cut when the BoE next meets on 18 December. Markets are convinced, putting the probability of such an eventuality at around 80 per cent.
Such a cut will, in all likelihood, be cast in cautious language. Inflation remains well north of the target and services inflation while falling is also elevated.
A Fed divided. September payrolls pivotal
Even with various Federal Reserve (Fed) spokesman on the tape in recent weeks, it is difficult to get a sense of where the consensus stands regarding a policy rate reduction at the next Fed meeting concluding on 10 December.
Chair Powell has signalled a degree of circumspection with respect to a policy rate reduction at that meeting.
Having said that the current median “dot plot” implies a cut at the December meeting.
Tonight’s delayed September non-farm payrolls data may well be pivotal in the Fed’s deliberations.
The consensus estimate for June non-farm payrolls is for an increase in employment of around 50k and unchanged unemployment rate of 4.3 per cent and wages growth, as measured by average hourly earnings at 3.7 per cent.
In my view, given the “dot plot” and given other data from non-official sources outcomes close to consensus would be sufficient to get the Fed over the line for a cut at the December meeting. But it has the potential to be a “messy” cut unless and until there is demonstrative evidence of falling inflation.
The ADP weekly payrolls have been consistent with a softening labour market as has the Challenger lay-offs report (albeit that both were potentially negatively influenced by the government shutdown).
The October Institute of Supply Management (ISM) manufacturing index (PMI) released early in November painted a weak manufacturing picture: the index slipped to 48.7 (consensus 49.5), marking an eighth consecutive month of contraction. The prices component remained at an elevated 58.0 (indicating accelerating inflation in the sector) while the employment component slipped to 46.0, consistent with ongoing manufacturing job losses. (50.0 is the neutral point between expansion and contraction).
The ISM non-manufacturing index released painted a better picture with the overall index remaining consistent with expansion at 52.4 (up from a neutral 50.0 in September). However, the price component remains elevated at 70.0 (again consistent with a further acceleration – even marked acceleration – in inflation) and while the employment component improved a little to 48.2 from 47.2, it remains consistent with some modest cooling in the non-manufacturing labour market.
So with an eye to the labour market side of the mandate the Fed may find the path of least resistance a further 25 basis point cut.
But the critical issue is still elevated price growth. A too aggressive approach to easing by the Fed while inflation remains elevated and “sticky” will encourage a “stagflation-lite” scenario. That would presage some prospect of ongoing volatility and challenging times for markets.
