NZ: Wage inflation remains low despite rising consumer prices - Westpac

Satish Ranchhod, Senior Economist at Westpac, explains that although the NZ’s labour market has been strengthening, wage inflation remains low and they’re expecting the March quarter Labour Cost Index will show that base wage rates rose by only 1.6% over the past year.

Key Quotes

“Similarly, the broader QES measures of average hourly earnings is expected to have risen by only 1.4%.”

“The low wage inflation we’ve seen in recent years has come against a backdrop of more general softness in consumer prices. This meant that even though nominal earnings growth was limited, households’ purchasing power was continuing to expand at a healthy pace.”

“However, the inflation backdrop has changed dramatically in early-2017. Consumer price inflation rebounded to 2.2%, and we expect that it will linger around 2% over the coming year. This signals increasing pressure on household purchasing power.”

“Combined with firmness in domestic activity, the rise in consumer price inflation is expected to see wage growth picking up (especially with businesses highlighting increased difficult sourcing both skilled and unskilled labour). Nevertheless, wages are still expected to rise fairly gradually.”

“From August, the overall level of wage inflation in the economy will receive a sizeable boost from the recent equal pay settlement for caregivers. This historic agreement will boost the wages of around 55,000 workers from August by a sizeable amount. It’s likely that we’ll also see some spill over to wage and salary rates in associated occupations. However, outside of specific occupations, we still expect that overall wage growth in the economy will be modest. In particular, private sector wage growth is expected to linger below 2% for most of the next two years even as consumer price inflation rises.”