Many people believe the RBA should begin raising interest rates due to the high inflation rate. The RBA usually has a target inflation rate of 2-3%, compared to the December quarter which was 3.5% on an annualised basis. During 2021, the RBA stated that they would only raise the cash rate if the Wage Price Index (WPI) increases by 3%.
What has happened?
Wages growth has remained below the 3% target to raise interest rates, while inflation remains above the target. The concern for the RBA Governor (Philip Lowe) is that increasing the cash rate could slow wages growth even further compared to inflation. The goal is to let wages catch up to inflation before any rate rises. In the latest RBA statement, the target was changed from “wages growth at a rate consistent with inflation”, to “labour costs at a rate consistent with inflation”.
Is the WPI increasing by much?
Over the past twelve months wages in Australia have increased by 2.3%. This is slightly below the 3% target. However, wages do seem to be growing at a faster rate and analysts have predicted this trend to continue.
What is the difference between WPI and labour costs?
The WPI purely tracks the increase in wages on an aggregate level. Labour costs includes the increase of wages, the social contributions payable by the employer and other costs such as taxes on labour, training costs, recruitment costs, etc.
Theoretically, it should be easier to reach the 3% target when using the labour cost method.
What does this mean?
It appears the RBA is looking to free themselves from the constraint they set last year, a 3% WPI increase before we see any rate rises. The RBA stressed that they must be patient in how the cash rate rise, which is understandable as the world deals with supply chain issues and the events occurring in Ukraine.
The first-rate rise is predicted to occur around August. This is possibly as minimum wages in most award agreements increase on the first of July each year.
Source: Westpac
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