Pay rises fuel inflation worries

Wages are rising at the fastest rate for at least 13 years, suggesting wage inflation will remain a concern for the Reserve Bank for some time yet.

But wage pressures are already factored into the bank's forecasts, economists say, so the data should not trigger any further interest rate hike.

Of the salary and ordinary time wage rates surveyed by Statistics New Zealand in the December quarter, a record 60 per cent have increased over the past year.

And the size of the increase is growing, with 43 per cent of wage rates up 3 per cent or more on December 2004, compared with 31 per cent recording similar increases a year earlier.

The median annual increase was 4 per cent and the average increase was 5.4 per cent, the highest increases since the labour cost index began in 1992.

Wages are usually the last cab off the rank during an economic upswing.

ANZ National Bank chief economist John McDermott said that because of the lags of nearly two years between skill shortages and labour costs, wage pressures were set to linger for some time, and the Reserve Bank would remain concerned about unit labour costs putting upward pressure on inflation.

But the quarterly employment survey also released yesterday hinted at some softening of the labour market, recording a fall of 0.2 per cent in paid hours, seasonally adjusted, in the December quarter.

HSBC chief economist John Edwards said yesterday's data showed some moderation in the labour market.

The labour cost index for all sectors and including overtime was up 0.8 per cent for the December quarter, down from 1 per cent for the previous quarter, while the annual rate was also down from the previous quarter. The quarterly private sector ordinary time increase was 0.7 per cent down from the previous quarter's revised outcome of 0.9 per cent.

Even though those figures were not seasonally adjusted, they strongly suggested wages growth did not further accelerate in the fourth quarter, he said. "For Governor Alan Bollard that will be good news indeed."

The Reserve Bank's preferred measure of underlying wage inflation, private sector ordinary time wage and salary rates, rose 2.9 per cent in the year to December, the same record rate as the year to September.

That reflected a 0.7 per cent increase for the quarter, well outside the normal 2 to 4 per cent range for that measure.

But that measure is adjusted by the statisticians in a bid to make it reflect rates for the same quantity and quality of work. Pay increases which reflect more responsibility, higher productivity or years of service are filtered out.

The unadjusted labour cost increase, which is a closer reflection of what is happening to payroll costs and pay packets, rose 5.4 per cent, up from 5.3 per cent in September and 4.8 per cent in December 2004.

Those figures were boosted by the public sector. For the private sector the unadjusted wage rate increase last year was 5.3 per cent, up from 5.1 per cent in the year ended September.

Goldman Sachs JBWere economist Shamubeel Eaqub said elevated wage inflation was already factored into the Reserve Bank's economic outlook.

"Also, the Reserve Bank in its own research suggests that the previous strong link between cost-push inflation [ie, wages] and consumer price inflation [which the bank targets] has weakened considerably.

"As such, today's data will not incite additional fears on the inflation front."