Last week the Reserve Bank released their official cash rate review. As always, it was a good review laying out the important trends that are influencing their thinking when it comes to setting the official cash rate.
However, there is no fun in leaving it there. There is one part of the statement I want to be pedantic about:
Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation, and strong net immigration.
There are two parts I want to discuss here:
- Increased labour force participation: The Bank is essentially saying that wage inflation is subdued, relative to what we would expect given the increase in employment, due to the fact that labour force participation rose. They are right, totally and completely – labour demand shifted right, and the supply curve was such that most of the change came in quantity not price, neat! However, this can give a misleading impression of the future if we don’t read it carefully – let us not forget that labour force participation rates are at a record high at the moment. As a result, the “capacity” in the economy is more limited – and future lifts in labour demand are likely to lead to nominal wage pressures (note this isn’t the same as higher real wages per se – but more like an increase in inflation expectations) than lifts in employment. This is indeed what the Bank was hinting at with the statement prior “Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non-tradables inflation.”
- Strong net migration: Hold on a second. We keep being told that strong net migration is pushing up inflationary pressures. Now we are being told that net migration reduced inflationary pressures (note that “wage inflation”, again not real wage growth, is a lot closer to real inflation, and real inflation expectations, than a point in times annual increase in the CPI). Higher population growth does indeed increase “demand” and “supply” so the relevance to monetary policy itself is indeterminate.