Australian Economy

The RBA has changed its mind on pay rises and it’s a bitter pill to swallow as business profits go up

Did you feel a sense of frustration, or even anger, when the Reserve Bank governor said workers’ pay rises should be capped at 3.5 per cent?

It’s a bitter pill to swallow when the data shows the cost of living – CPI at 5.1 per cent – is rising faster than that.

But it also may have come as a surprise considering that as recently as March the Reserve Bank governor Philip Lowe said the bank was keen to see evidence of stronger wage growth.

“Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target,” Dr Lowe said.

And there were still no signs of any real lift in wages growth in April.

“Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target.”

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Inflation higher than expected: RBA Governor Philip Lowe

So what changed?

It began last month when the Reserve Bank stated that, “the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms.”

All of a sudden, without warning, wages growth, after a decade of hovering around record lows, was suddenly experiencing lift off.

How do we know this?

Well, the Reserve Bank’s liaison program informed the bank’s board it was happening. The Reserve Bank surveys businesses and business groups to gauge whether or not they are offering pay increases.

The RBA’s April liaison program consisted of 63 meetings with businesses and business groups. The majority of the meetings were with individual businesses. More on that later.

But outside of that, are we actually seeing enough evidence of stronger wages growth?

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Play Video. Duration: 8 minutes 15 seconds

Is the cost of living really going up?

Are wages growing?

Yes, wages are growing. They have been for some time.

But there’s an important distinction between wages growth and the strength of that growth.

That’s because the cost of living, or inflation, is also climbing – hence why the pace of wage growth becomes important.

The inflation of your pay packet needs to match the inflation of the prices of the goods or services you buy — otherwise your money doesn’t go as far.

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