Government braces for inflation blip as wages fight looms

government braces for inflation blip as wages fight looms

Treasurer Jim Chalmers said the fight against inflation was not “mission accomplished”. (ABC News: Nick Haggarty )

Treasurer Jim Chalmers has sought to get ahead of an expected inflation jump in Wednesday’s latest figures, warning the government knows the inflation fight is “not mission accomplished”.

The Australian Bureau of Statistics (ABS) will today publish inflation figures for the month of January. The median market expectation is for 3.6 per cent, compared to the 3.4 per cent recorded in December.

Both figures are for annual inflation – the change in prices compared to a year earlier.

The ABS warns its monthly figures are more volatile than its quarterly figures, as they track the prices of a smaller set of items. It only began publishing the monthly measure in October 2022.

On both measures, inflation has fallen in the past year. Its trajectory is broadly in line with the expectations of Treasury and the Reserve Bank of a return to the Bank’s target range of 2-3 per cent by mid-2025.

But a day out from the release, the government acknowledged expectations there will be a blip on this glide path.

Treasurer Jim Chalmers said: “We know the monthly numbers can bounce around and are less reliable than the quarterly measure, but the overall direction of travel is clear… we are making welcome progress in the fight against inflation.”

Mr Chalmers added the government wanted inflation “to moderate further and faster… we know it’s not mission accomplished.”

Taylor Nugent, senior economist at the National Australia Bank, expected a slight uptick in the January figure but said the RBA was “unlikely to update their thinking much” as result.

“The [change] in the first month of the quarter is heavily weighted towards goods… [and] provides little news on services,” he said.

Inflation in services has been more persistent than inflation in goods and has been a key focus for the RBA.

He added January was an especially difficult month to produce figures for given unusual consumption habits in that month, including sales and travel.

“January can be tough at the best of times, and for a new series with short back history and unfamiliar seasonal patterns it is an extra challenge,” Mr Nugent said.

Wages fight looms

Wednesday’s inflation number comes amid heightened focus on the contribution of wages to inflation. The latest wages figures showed wages grew faster than prices in the year to December 2023.

Earlier this month, Treasury Secretary Steven Kennedy said there was “no evidence of wage-price spiral emerging”.

A wage-price spiral is a process where high wages fuel high spending and by extension further inflation.

Dr Kennedy said wages had “strengthened”, but were at a level he considered “sustainable” and consistent with inflation returning to normal soon without pushing unemployment much higher.

“It looks to me that we could hold this unemployment rate at low levels — lower levels than we’ve seen for many decades,” he said.

“I think we’d have to go back into the seventies… that would be a tremendous outcome.”

But Treasury advice, which was obtained under freedom of information laws by the Financial Review, suggested wages had been the leading contributor to inflation since mid-2023, overtaking supply pressures.

This advice pre-dated Dr Kennedy’s recent comments and is not evidence of a wage-price spiral, but reflects the prominence of wages in the tail end of the inflation fight.

In its latest statement on monetary policy, the Reserve Bank said it expected wages growth to “ease” and agreed with Dr Kennedy that current levels were “consistent with the inflation target”.

But it added the longer it took inflation to return to target, “the greater the erosion of the purchasing power of Australian households and the greater the risk that inflation and wage expectations drift higher”.

“History shows that, should this occur, it would require more monetary policy tightening and a costly period of higher unemployment to stabilise inflation expectations and return inflation to target,” it said.

Business groups have expressed more pessimism about wages. Innes Willox, chief executive of employer lobby Ai Group, suggested there was “a real risk that the high wage increases we are now seeing in parts of the economy are the thin edge of a very damaging wedge”.

Mr Willox wants the Fair Work Commission to deliver a smaller increase to minimum and award wages this year than the 5.75 per cent it delivered last year. He said higher wage increases should only follow productivity improvements.

The Australian Council of Trade Unions have welcomed elevated wage growth, which Secretary Sally McManus characterised as “wages finally getting ahead after years of going backwards”.

“Wages finally moving is good news for the economy as consumer spending is essential to its health… workers still have a long way to catch up to restore real wages to where they were pre-pandemic.”

Business and union groups typically make submissions to the Fair Work Commission ahead of its determination, as does the government.

The Albanese government’s practice has been to call for an increase in line with inflation, but not to call for a specific increase. The government has repeatedly said it does not believe wages are growing too fast.

“Wages growth definitely isn’t the reason why we have high inflation in this country,” Finance Minister Katy Gallagher said on Tuesday.

“We want to get real wages growth happening. We’re seeing that for the first time in many years now… the advice from Treasury and the RBA is that wages growth is not fuelling inflation.”

The Opposition has also not suggested wages growth is too high, pointing instead to a fall in real disposable income per person over the last 18 months to argue households are worse off.

“No matter what the inflation numbers say today the fact is living standards have collapsed,” Shadow Treasurer Angus Taylor said.

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