Roger J Kerr says a combination of the pay equity adjustment in the public sector and shortages of skilled workers across multiple industries 'must certainly lead to upward wage pressures'

By Roger J Kerr

The local financial markets are not expecting anything too different for the June quarter’s CPI inflation result tomorrow to what the consensus forecasts are at +0.20/+0.30%.

Basically, significant increases in food prices over recent months should be cancelled out by reductions in fuel prices due to lower crude oil prices and a generally higher NZD/USD exchange rate.

Going forward, the debate about inflation trends will still focus on whether wages will ever increase and whether the well above average capacity utilisation in the NZ economy will also feed into bottlenecks and thus inflation.

A combination of the pay equity adjustment in the public sector and shortages of skilled workers across multiple industries must certainly lead to upward wage pressures.

We have yet to see these pressures reflected in official wages statistics.

However, anecdotal evidence across our client base suggests that major catch-ups on very low wage increases over recent years are very much on the cards.

The RBNZ do seem a bit complacent about this wage-related inflation risk, however the trends over recent years do not evidence any sudden emergence of wage pressures.

Recent tightening up of immigration regulations for work and student visas also points to even more shortages of qualified labour sources across our key industries (particularly hospitality, tourism and transport).

Whilst higher wages (thus eventual inflation) and a cooling in the Auckland housing market favour the moneymarket’s pricing of a first OCR increase in mid-2018, the RBNZ’s 2019 timing is supported by the higher TWI currency value.

The TWI is currently above 78.00 and if it was to stay at this highpoint for another six months or so, the current RBNZ forecast of the annual inflation rate reducing to 1.00% by March 2001 may be too high as the RBNZ are assuming a 76.00 TWI.

The exchange rate plays a pivotal role in inflation and GDP growth outcomes in New Zealand and the current TWI levels point to a risk of annual inflation being below 1.00% by March 2018.

Therefore, the RBNZ should be sending a signal in their 10 August Monetary Policy Statement that monetary conditions (exchange rate and interest rates) are too tight as they are causing the annual inflation rate to move below the 1.00% minimum. Certainly well below the 2.00% inflation band mid-point that RBNZ target.

However, I suspect Trump trade tariff changes and political risk in New Zealand will send the NZ  dollar lower over coming weeks/months and will save the RBNZ from having to adjust their already dovish inflation forecast even lower.

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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9 Comments

How about the house price bubble collapse in progress causing development in the building sector to stall. Double the unemployment rate in the next 1-2 years might paint a very different picture for wage inflation. Will the builders be willing, or capable, to retrain is the question.

If the construction sector goes into decline it will mean downward pressure on wages in that sector.

Thats not a bad thing given the distortions in the economy, where a high school dropout with a nail gun can earn more than a young doctor right now

My builder neighbour was telling me in the weekend of Cranston homes going bust, and another he has heard of. He seemed to think the overshoot was caused by inferior workmanship meaning the fix up gangs that do the warranty type work after the home is commissioned had increased from one to five. These escalating cost overruns not being foreseen, or managed, and causing the eventual liquidity issues.

A decline in construction costs would be a major step to improving affordability. The high level of construction costs is a function of the sheer amount off mortgage credit that has been tipped into the residential construction sector, wages have blown out massively. The only thing I can see shaking that out is a serious recession in the residential building sector

Does an increase in wages automatically feed into inflation ?

I understand that "full"employment can lead to inflation , but we have had over 90% employment for years now, and benign inflation .

Skills shortage caused by what? How about shortsighted appraoch to our youth? Why train the 90,000 unemployed youth when business can just import compliant supposedly skilled migrants..and pay them peanuts?

http://www.stuff.co.nz/business/93170524/90000-young-kiwis-have-no-job-n...

Wages aren't going anywhere until the government gets sent a message that mass immigration isn't what the public wants.

Record numbers of immigrants have kept a lid on wage pressure and they will continue to do so until somebody stops this madness.

"Basically, significant increases in food prices over recent months" is this seasonally adjusted? I mean tomatoes are now $8.99 a kilo (or more) up from $3.99 a kilo in the summer, not surprising as its winter.

the current government will talk about restrictions until after the election wages can't go up as our economy relies on low wages in agriculture horticulture and tourism. Without minimum or below minimum wages what we rely on will collapse.

Also interest rates cannot rise as we are at 167% debt to income so just a couple of percent rise would see house holds drown.

More importantly this is a global economy until our minimum wage matches that of the global minimum then there is little chance of the wages rising why should it?

What we need is deflation in our living costs so that we can manage our lack of wage growth we need to look at what we really need or don't need and focus on those things.