Mark Lister: Time to ask the boss for a pay rise

This year your boss might not laugh when you ask for a pay rise. Photo / 123RF

This year it could be worth asking the boss for a pay rise, and you might not get laughed out of the corner office quite as quickly this time.

We've got an economy that is rocketing along. Employment growth is outpacing our record population growth and unemployment has fallen below five per cent for the first time since 2008, despite the participation rate close to all-time highs of about 70 per cent.

There's been one thing noticeably absent from these great statistics though, and that's wage growth.

While the unemployment rate has been recovering from its post-GFC high, and with the strongest migration we've ever seen adding plenty of keen new workers to the labour pool, employers have had it easy for the last few years.

It's pretty tough to argue for a raise when companies can point to broader inflation being so low, and if there's a queue of suitors outside who will happily take your job at the same rate. The balance of power has been firmly in favour of employers, but I think a change in that dynamic is on the horizon, and maybe closer than we think.

The US has been in a similar position, with a plentiful labour market keeping wage growth non-existent despite decent economic growth and growing corporate profits. The tide has started to turn over there, with unemployment having fallen below five per cent after hitting double-digits in 2009.

All of a sudden the pool of available workers is looking a bit thin, employers are competing more fiercely for staff, and wages have started to lift a little. In the last monthly US jobs report, average hourly earnings for December saw their strongest annual gain since June 2009.

I think we'll see similar trends emerge here in 2017, with a tighter labour market starting to put a bit of upward pressure on wages. This usually begets broader price rises, so could be a catalyst for a pickup in general inflation as well.

With higher inflation comes higher interest rates, so it will be a double-edged sword for many workers, as higher borrowing costs and other expenses could well offset any wage gains.

There are other factors at work that will bump up general CPI inflation this year too. Fuel costs are rising, with oil prices about 50 per cent higher than a year ago and petrol up about 20 cents a litre. That alone will influence the next couple of inflation reports, especially with the NZ dollar a bit lower against the greenback.

Meanwhile, Chinese manufacturing prices have started to increase for the first time in almost five years. If the low cost factories of the world are beginning to charge a little more, it's a matter of time before that flows through to pricing pressures elsewhere.

With higher inflation comes higher interest rates, so it will be a double-edged sword for many workers, as higher borrowing costs and other expenses could well offset any wage gains.

There are important implications for investors too, with inflation the traditional enemy of investment returns. It erodes the spending power of cash balances and reduces the value of assets that can't grow their earnings or cash flows to match.

I wouldn't bet on a quick return to the high-inflation periods of years past, but 2017 will be the year we see it begin to make a comeback.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.