Australia’s September quarter Wage Price Index (WPI) will be released later today.
Given its implications for household spending, broader economic growth, labour market conditions and the outlook for inflation and official interest rates, the WPI is now arguably the most important data release in Australia, particularly at a time when the housing market is weak.
How it evolves will go a long way to determining how the Australian economy will perform in the period ahead.
After falling to the lowest levels on record last year, the WPI has started to edge higher in recent quarters, helped in part by tighter labour market conditions and large increases in Australia’s minimum wage rate.
That trend is expected to have continued in the September quarter, helping to underpin the view held by the vast majority in markets that the next move in official interest rates from the RBA is likely to be higher.
However, this report has often surprised in the past, especially to the downside, meaning this report carries the potential to generate volatility in Australian financial markets.
An inline or slightly hotter quarterly number could see expectations for a RBA rate hike get brought forward quite substantially, while another soft outcome could well raise speculation that the next move in interest rates may not be up after all.
While it may not have received the same attention as other data releases in the past, those days are now long gone given the increased importance of wage growth on so many facets of the economy.
Here’s the state of play.
- The WPI measures changes in ordinary hourly rates of pay, not the amount of hours worked or compositional changes in the workforce. Just hourly wage rates excluding bonuses.
- In the June quarter, private sector wages — the largest employer in Australia — grew by 0.55%, leaving the change on a year earlier at 1.99%, up from 1.92% in the year to March.
- Public sector wages grew by a slightly faster 0.61% over the quarter, and by 2.41% over the year.
- Combined, the WPI grew by 0.6% for the quarter, leaving growth over the year at 2.1%, unchanged from the level reported in the March quarter.
- Including bonus payments, wages grew by 2.5% from a year earlier, down marginally from the 2.7% pace seen in the prior quarter.
- Today, most economists expect that wage growth will continue to improve.
- The median forecast looks for a quarterly increase of 0.6%, the same pace reported in the three months to June. Individual forecasts range from an increase of anywhere between 0.4% to 0.7%.
- Should quarterly growth lift by 0.6%, the year-ended rate is expected to accelerate to 2.3% without any adjustments to prior data. There have been adjustments in the past.
- With inflation running at 1.9% over the same period, a consensus result would leave real wage growth at 0.4% over the year.
- At a time of tightening labour market conditions and reports of skill shortages, some have speculated that employers are now choosing to reward key staff with bonuses, rather than large wage increases for all workers, helping to explain why the WPI remains weak. As such, there’s likely to be a few eyes cast on the WPI that includes bonus payments.
- At 5%, Australia’s unemployment now sits at the level where some expect wage pressures to increase, known as the non-accelerating inflation rate of unemployment, or NAIRU for short. However, many suspect that Australia’s NAIRU level is now significantly lower given the evidence from other advanced economies in recent years.
- Previously, RBA Governor Philip Lowe has said that annual wage growth of around 3.5%, along with a modest improvement in labour market productivity, was likely required to keep underlying inflation steady at the midpoint of its 2-3% medium-term target.
- Any sign that wage growth is moving faster towards this level, or perhaps even further away, will likely spark volatility in financial markets given how influential it will be on so many areas of the Australian economy ahead.
The WPI will be released at 11.30am AEDT.
Business Insider will have all of the details as soon as it hits the screens.