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With skyrocketing inflation, rising interest rates, and falling real wages, the potential for a dangerous wage-price spiral is now an urgent challenge for the incoming Australian government

Public Policy / opinion
With skyrocketing inflation, rising interest rates, and falling real wages, the potential for a dangerous wage-price spiral is now an urgent challenge for the incoming Australian government
the wage-price spiral

“Australians know there are significant challenges in our economy. … We have inherited the worst fiscal position of any incoming government since at least World War II.”

That’s how the new Treasurer, Jim Chalmers, greeted the release of Australia’s latest National Accounts last week. Self-interested bombast or an accurate assessment? Probably a bit of both. 

First, the good news. According to the Australian Bureau of Statistics, the Australian economy grew by a higher than expected 0.8% in the March quarter. This was despite that period seeing the peak in the Omicron outbreak and severe weather events in several states.

GDP growth for the year to March was a respectable 3.3%, and the economy is now 4% bigger than it was before the Covid-19 pandemic struck.

Australians built up extra savings during the pandemic of around $260 billion giving them the capacity to spend as the country now returns to a kind of post-Covid 19 normality. The latest ABS data show retail sales were up 0.9% in April. That was a rise of 9.6% on the same month last year. 

The household savings ratio has decreased from 13.4% to 11.4% but is still well above pre-pandemic levels. Strong savings are backed up by unemployment at a decades-low rate of 3.9%. 

Government spending is also expansionary as the federal government runs significant deficits and several states continue with major infrastructure programmes.

International trade is another positive. Australia continues to benefit from an appreciation in the price of commodities. Export prices are back to the highs last seen in the 2010-2011 mining boom.

In the March quarter, the terms of trade were up 5.9% as export prices rose significantly faster than import prices. In the latest trade figures for the month of April, the surplus in goods and services increased to $10.5 billion.

Given the ongoing crisis in Ukraine, elevated prices for key Australian exports like wheat, natural gas, and coal look set to persist for the foreseeable future. That augurs well for both the current account and government tax revenue.   

So much for the good news.

As Treasurer Jim Chalmers put it, Australians now face “skyrocketing inflation”, “rising interest rates”, and “falling real wages”.

Inflation rose 2.1% in the March quarter and 5.1% in the previous 12 months. That figure is expected to rise further through 2022/2023 due to a range of factors including wage and salary increases, supply constraints, and rising energy costs.

The ABS survey of business conditions and sentiment reveals that “over a third of all businesses (38%) expect to increase their prices by more than usual” over the next three months.

Interest rates will play a significant role in business decision making. And they are heading up.

The Reserve Bank of Australia came under fire for being too slow to increase interest rates in the face of rising inflation. It finally succumbed to the inevitable at the beginning of May and raised the cash rate from 0.1% to 0.35%.

On Tuesday it moved again, this time raising the rate by a higher than forecast half a percent to 0.85%. The Governor of the RBA, Philip Lowe, said that “inflation is expected to increase further” and no doubt he will raise rates again this year.

Bank lending rates will follow suit, putting pressure on many businesses and consumers.  

The cost of servicing state and federal government debt will also increase with rising interest rates. That’s a big issue for the new Treasurer as he inherits federal government debt approaching a trillion dollars and budget deficits as far as the eye can see. 

Salary and wage earners receiving pay rises less than the 5%+ inflation rate suffer falling real incomes. That won’t go down well with workers hoping for some good news after two years of living through a pandemic.

An indication of the trouble ahead came on Monday when the NSW Premier announced that public sector wages will increase 3%. The response from union leaders was immediate and robust. Public Service Association general secretary Stewart Little branded it “insulting”. NSW Nurses and Midwives’ Association assistant general secretary Michael Whaites called it a “slap in the face”. Secretary of Unions NSW Mark Morey said it “adds insult to injury”.

The potential for a dangerous wage-price spiral is obvious.   

In another bad sign for the economy, consumer confidence is falling. The Westpac-Melbourne Institute Index of Consumer Sentiment dropped 5.6 percent in May, the sixth monthly drop in a row. That’s the biggest drop since June 2015. The index is now at its lowest since the depths of the pandemic in August 2020. The latest ANZ-Roy Morgan Consumer Confidence Rating released on Tuesday recorded a drop of 4.1% in the week to 5 June.

Accelerating inflation, rising interest rates, economic uncertainty, and geopolitical tension are clearly taking a toll on consumer confidence.

The direction of house prices is another factor in consumer nervousness. Last week property data provider Corelogic revealed the first fall in its national Home Value Index since September 2020. It attributed the fall to “higher interest rates, rising inventory levels and lower sentiment”. The two largest markets are leading the way down. According to Corelogic, “Sydney has been recording progressively larger monthly value declines since February, while Melbourne has fallen across four of the past six months”.

Some analysts are now predicting house price declines over the next 18 months in the 15-20% range. That would have a major impact on consumer confidence and spending. The Australian economy has long been a beneficiary of the wealth effect of rising house prices. It seems unavoidable that a reversal of that trend has now begun.      

Other emerging problems for the Australian economy include skyrocketing gas and energy prices, and a fragile building sector faced with soaring costs and volatile supply chains.

All in all, a challenging economic picture for the brand-new Labor government. Just as well it includes three PhDs in economics – from Harvard, Yale, and Oxford.

The Treasurer has a PhD too, except his is in political science. Still, given the potential economic troubles in three years’ time, that might be more useful than an economics degree in convincing the public to vote for Labor at the next election.

Ross Stitt is a freelance writer and tax lawyer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.

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"The potential for a dangerous wage-price spiral is obvious."

Ah, the dreaded wage price spiral. A very unfortunate thing for Queensland Man who is just expected to cop it in terms of higher living costs, but can't get a payrise because of the 'greater good' issue of an apparently terrifying spiral where his wages might actually have to increase regularly. 

But running off a few hundred billion in Covid support? No dramas there. That's easy.  


I'm sure there's a massive fall required before it's as bad as living in NZ.



The IMF will be on their case to cut public health and education, welfare spending.


... and to greatly increase funds for the " climate change emergency "  ... 



Serious question. How would you briefly summarise your view of climate change/global warming? Is it a hoax, is it real but nothing to worry about, real but just something we'll easily adapt to, or what? I would really like to know.


Looking at relocating to Sydney as the moment..


I just messaged my friend over there that she might want to lock in her loans for over 3 years based on what is happening here and she got upset at the messenger. Oh well.