OPINION: With labour costs, not profits, the biggest driver of inflation, the central bank will have to go higher to crush Australia’s wage-price spiral.
On December 9, 2021, Coolabah’s internal research team presented highly contrarian analysis regarding where the Reserve Bank of Australia would take interest rates over the coming years. This was part of a weekly “hunger games” competition that we run every Thursday where three individuals are randomly selected to pitch their best idea.
This was recently confirmed in freedom of information disclosures from the central bank in which it published internal modelling pointing towards a higher neutral rate of 3.8 per cent. The problem is that this may be too slow. During the week, we received new evidence that Australia is grappling with a nascent wage/price spiral. The official statistician’s data highlighted that the RBA’s preferred measure of wage growth, known as unit labour costs, had expanded by an astonishing 8 per cent over the 12 months to March 2023.
There are many possible explanations for this productivity malaise, including: under-investment in capital and technology; business interruptions caused by the pandemic; pulling unskilled workers into jobs as the unemployment rate went to excessively low levels; and never-ending decades of prosperity dulling our incentive to work hard and generally making us entitled and lazy.
They find that for the remaining 90 per cent of the non-mining economy, labour costs, not profits, are the biggest driver of recent inflation. Specifically, Davies comments: “Non-mining prices are up 7 per cent over the last year, reflecting a 4.4 percentage point contribution from higher unit wages, 2.3 percentage points from unit profits and 0.3 percentage points from unit net taxes.”
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