Australian wage growth picks up, but pay lags behind inflation

SYDNEY Reuters - Australian wage growth rose at the fastest pace in almost eight years last quarter as red-hot demand for labour drove unemployment to generational lows, yet pay gains missed forecasts and lagged badly behind inflation.

The Australian Bureau of Statistics showed its wage price index WPI rose 0.7% in the June quarter, a gain of 0.8%, compared to projections for a 0.8% increase.

The annual rate went up to 2.6%, from 2.4%, but missed forecasts of 2.7%. The private sector saw growth of 2.7%, while the public payroll trailed at 2.4%.

The Reserve Bank of Australia RBA has worried that high inflation is feeding through to pay and price setting behaviour and could argue for a more restrained pace of tightening.

Markets reacted by lengthening the odds on another half-point hike in rates by the RBA in September, while lowering the local dollar by 0.5% to $0.6992.

Since May, the central bank has raised interest rates by 175 basis points to 1.85%, and flagged more hikes ahead.

Markets are betting that rates could go up as far as 3.5% by April next year, as inflation has shot to a 21 year high of 6.1% and is expected to top 7% in the coming months.

A pick up in wage growth was a welcome recovery from an all-time low of 1.4% seen in late 2020 and all signs favor further gains ahead.

The unemployment rate has dropped to the lowest in 48 years, at 3.5%, while record vacancies point to strong demand for workers.

Business surveys show firms struggling to find suitable staff and having to pay up to attract and retain them.

Australia has a system of sector-wide enterprise pay agreements that only roll over every two or three years, so official wage data tends to shift slowly.

The bank predicted that wage growth would increase to 3.75% by late 2024, due to the RBA's liaison with businesses finding 60% expected to lift wages by more than 3% in the year ahead.

In June, a pay rise of 5.2% was given to those on the minimum wage, a bump that will only start to show in the September-quarter wage numbers.

The minimum wage hike will result in a 1.1% increase in wage growth this quarter, which would lift annual wage growth above 3% for the first time since 2013, said Marcel Thieliant, senior economist at Capital Economics.

With the labour market tightening, we expect wage growth to rise to 3.5% by mid- 2023.