Treasury thinks the bottom is in for Australia's long slowdown in wages growth

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One of the big challenges for the federal budget has been the slowing in wages growth, a trend that has been a feature of the Australian economy for a decade.

It’s a similar story with the consumer price index – what we typically refer to as the inflation rate.

Both of these are toxic for the budget because lower wages and prices being lower than forecast gnaw away at one of the key sources of tax revenue in GST and the income tax dollars you and I pay.

However, the federal Treasury thinks the bottom may be in, with wages and consumer inflation forecast to recover modestly in the financial year 2017-18, though only by a small amount.

Here are the detailed forecasts, with CPI and wages price forecasts highlighted. (Note they are downward revisions from the pre-election forecasts earlier this year).

Source: Treasury / MYEFO

And here’s Treasury’s commentary:

Consumer price inflation is low reflecting subdued wage growth and other factors such as heightened competition in the retail sector, slower growth in rents and lower import and petrol prices. There is also a subdued inflationary environment globally. Consumer prices are expected to grow by 1¾ per cent through the year to the June quarter 2017, before picking up to 2 per cent through the year to the June quarter 2018. This is lower than forecast at the 2016 PEFO.

Wage growth has also softened since the 2016 PEFO, in line with weaker consumer price outcomes and other factors such as spare capacity in the labour market… As with consumer prices, wage growth is expected to increase gradually over the forecast period to be 2¼ per cent through the year to the June quarter 2017 and 2½ per cent through the year to the June quarter 2018.

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