The cold, dead hand of low inflation is starting to grip Australia's economy

The Night’s King from Game of Thrones. Image: HBO

Australian wages are growing at their slowest pace since records began. The March quarter Wage Price Index, released today, showed an increase of just 0.4% seasonally adjusted, with the annual rate slightly lower than expected at 2.1%.

While it was only 0.1% lower than the market forecast in annual terms, the fall continues the collapse in wages growth that Australian workers have been experiencing over recent years since the end of the mining boom.

That weakness in wages is important for the economy on a number of fronts.

Wages growth, or lack there of, sets the base rate through which personal and household consumption can grow in the economy without the addition of a run down in household savings and or increase in household debt.

Equally slower wage rises mean households expectations about increasing levels of income improving their ability to reduce debt may be challenged and lead to more saving and less spending.

Behaviourally that’s vitally important for confidence. But it may also complicate the economic and budget outlook if consumers and households are more reluctant to reduce their saving and increase consumption and spending in the manner envisaged by the federal budget.

Low wages and low inflation can, as a result of this linkage, become tied in a downward spiral which feeds back into weaker economic growth.

That suggests that Australia has slipped into the type of low inflation world that has gripped much of the global economy for many years.

James Alexander, Nikko Asset Management’s Australian head of fixed income which manages $10 billion in client funds, told Business Insider the fall in wages growth underscored the lack of control the RBA has over the non-tradable inflation sectors.

Non tradables are the bit in the CPI basket not subject to currency or market fluctuations. They make up around 60% of the CPI basket, Alexander said.

“Non-tradable inflation tends to be the stickier part of the basket. So if it is slipping below the RBA’s 2-3% band then overall inflation is going to be hard to keep inside the band”, he said.

It’s pretty clear why RBA sees trouble ahead for Australia on the low inflation front. It’s also clear why they nudged the RBA board into this month’s easing. Today’s data suggests the staff will probably nudge the board to cut at least one more time this year.

NOW READ: Australian wage growth hits another record low.

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