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TIM HEXT: This week’s modest wages data won’t last

The latest wages data shows surprisingly modest growth in some sectors. But wages are the ultimate lagging indicator and that will soon change, says our head of government bond strategies TIM HEXT

DESPITE increasing anecdotal evidence of rising wages, the latest data shows the price of labour grew a modest 0.7% in the March quarter.

Over the year wage growth was 2.4%, according to the Wage Price Index (WPI) released yesterday.

Only one sector nudged over 3% annually and none grew at or near 1% for the quarter.

In some areas this was not surprising. But in industries such as construction and retail trade this flies in the face of worker shortages. 

This will change, since we’ve really only fully opened up this year.

Wages are the ultimate lagging indicator — and patience is required.

Annual and quarterly changes, WPI Mar 2022 (total hourly rates of pay excluding bonuses, per industry):

Source: ABS, Wage Price Index, Australia, March 2022

Earlier this year the Reserve Bank had WPI front and centre when trying to ignore rising inflation and pressure to raise rates.

Unless we got strong wage growth, inflation would eventually come back, the RBA said.

But in May — as they threw in the towel and hiked rates — the RBA referenced broader measures of wages:

“The outlook for broader measures of labour costs had also been revised up; average earnings were expected to increase at a faster pace than the WPI, as firms turned to bonuses, allowances and other measures to attract and retain workers,” the RBA said in its May board minutes.

They also highlighted the great inertia of wage growth:

“While the inertia arising from multi-year enterprise agreements and current public sector wages policies would continue to weigh on aggregate wages growth in the near term, a period of faster growth in labour costs overall was in prospect.”

The main battleground this year will be public sector agreements across the big employment areas of health, education and transport.

Find out about

Pendal’s Income and Fixed Interest funds

The public sector employs around 20% of the workforce. These are state government responsibilities and for now at least the governments largely have a 2.5% wage cap.

However unions quite rightly point out that a 5% inflation rate is seeing real wages fall. With staff shortages in key areas they are in a good position to extract wage rises closer to 5% than 2.5%.

Maybe for teachers and nurses they can offer 2.5% and a “thank you” bonus of 2% for their efforts through Covid, keeping their policy “intact”.

The RBA expect the WPI to hit 3% by year end and 3.5% by the end of 2023.

Chances are we hit these levels sooner. 

Let’s remember this is a good thing overall. It does however add to the narrative that inflation will struggle to fall back to target anytime in the next few years.

What it means for fixed interest investors

Investors should still be looking to inflation bonds ahead of nominal bonds.

In our portfolios we have been adding inflation risk, which has cheapened up in May.

Inflation will moderate next year but levels above 3% look like being more entrenched over the next two to three years, helped by wages eventually nearing 4% growth.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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