Wage growth outpacing inflation — good news to ease cost of living

Wage growth is increasing at a rate above that of inflation, which is good news for Australian citizens and also the Albanese Government. Stephen Koukoulas reports.

EVIDENCE IS stacking up that the cost of living pressures that have been hurting consumer finances for the last few years are not only fading, but are starting to reverse.

It is good news.

In simple terms, wages are now increasing at a pace above the rate of inflation which is helping to boost the purchasing power of consumers.

It is just a little at this stage, but the outlook is for a meaningful, sustained and long-overdue upturn in real wages over the next few years.

Let’s start with a few facts on how real wages have increased since the June quarter 2023. Over the last three quarters, the quarterly inflation rate has been 0.8%, 1.2% and 0.6%. The increase in wages, measured by the Wage Price Index over the same period, has been 1.0%, 1.3% and 0.9%.

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This means that wage growth has outpaced inflation by 0.2%, 0.1% and 0.3%, respectively, in those three quarters. These are not huge gains in real wages, but gains they are. They come after almost three years where the well-documented inflation spike overwhelmed wage growth, which was manifest in cost of living concerns for Australian consumers.

The reasons for this welcome upturn in the purchasing power of wages include a combination of changing macroeconomic conditions and a series of Government policy initiatives.

Critically, inflation has fallen as global supply chain issues have been largely resolved and central banks around the world aggressively tightened monetary policy as the impact of the COVID pandemic has abated. The Reserve Bank of Australia (RBA) has been part of the interest rate hiking cycle and the path to lower inflation is one vital aspect of helping to support a recovery in real wages.

Most forecasters, including those at the RBA and Treasury, are expecting the annual inflation rate to continue to decline over the next two years with a path to 2.5% assured as the economy continues to slow.

Inflation around the target level looks assured, given the mix of weak growth that feeds into reduced pricing power from the business sector. The stability in the global commodity price cycle is helping inflation to be contained. If the economy weakens beyond current expectations, inflation will be even lower.

At the same time, wage growth is lifting as a result of what was a very tight labour market with the unemployment rate recently below 4% for two years creating a shortage of workers, both skilled and unskilled, which in turn fed into wages.

The Government can also take credit for part of the lift in wages.

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Under the Fair Work Commission (FWC), minimum wages were increased by 5.75% on 1 July 2023 and 5.2% on 1 July 2022, which are two of the largest increases in several decades.

These minimum wage increases were endorsed by the Albanese Government and fed through to increases in some other award wages. These decisions of the FWC have been a critical aspect of tackling the cost of living problems through the wages side.

The Government has also given a substantial 15% wage increase to nurses and other workers in the aged care sector as part of its broader multi-purpose strategy of retaining and increasing employment incentives in this part of the workforce. It also helped to address the gender pay gap, given that female participants dominate the nursing and aged care sectors.

The good news is that these trends are set to continue. The latest data showed annual inflation easing further to 3.4% in January 2024. This is pointing to another low inflation result for the March quarter and with quarterly wage growth expected to be 1%, there will be a further rise in real wages.

The good news continues for consumers with the Albanese Government’s revised income tax cuts for 13.6 million taxpayers coming into effect on 1 July 2024. These will boost their take-home pay at the very time inflation is falling.

This is likely to coincide with a series of interest rate cuts. Money markets are pricing in interest rate cuts in the second half of 2024 and into 2025, and if these are delivered by the RBA, there will be a further boost to cash flows for mortgage holders and small businesses with overdrafts.

The last few years have been tough for consumers, but a turn for the better is unfolding. Rising wage growth, falling inflation, income tax cuts and interest rate cuts point to better times later in 2024 and into 2025.

This is a cocktail of news that the Albanese Government will embrace as it sets itself for an election in the first half of 2025. If consumers are feeling better financial news in their bank statements, it will be a critical factor in the way that people vote.

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past Chief Economist of Citibank and Senior Economic Advisor to the Prime Minister.