Wage inflation jump fuels rate-rise fears

Wage rises accelerated in the September quarter, making another interest rate hike by the Reserve Bank a near certainty.

And the unions have vowed to continue their campaign for pay rises of 5 per cent or more.

The bank's preferred measure of underlying wage inflation, the private sector labour cost index, rose 0.8 per cent in the quarter, pushing the annual increase to 2.8 per cent from 2.5 per cent in June and March.

When the public sector was added, the overall quarterly increase was 1 per cent and the annual rise 3 per cent, Statistics New Zealand said.

These figures are intended to be an indicator of unit labour costs; the pay increases employees get are adjusted to deduct that part which can be seen as compensation for higher productivity.

The unadjusted labour cost index, which reflects what is happening to pay packets and payrolls, jumped 2.2 per cent in the September quarter, making 5.7 per cent for the year. If the public sector is stripped out, the quarterly increase was still 2.1 per cent and the annual increase 5.5 per cent.

All these numbers are high by historic standards. The Engineering, Printing and Manufacturing Union, which has been campaigning for increases of 5 per cent or more, said the single factor driving wage growth this year, and absent in previous years, was a concerted campaign by unions to lift wages.

National secretary Andrew Little said the campaign would continue next year.

Business New Zealand chief executive Phil O'Reilly said: "Feedback from our members shows the skill shortage is their biggest constraint. It's likely employers are paying more to keep employees, regardless of productivity considerations.

"Of course, pay increases without productivity increases just means more cost to businesses and they become less competitive - not good for business or workers."

The Reserve Bank was already forecasting labour cost growth to climb to 3 per cent over the next two years, but economists said the rate at which wage inflation was accelerating would concern the bank.

"The Reserve Bank has a major inflation problem on its hands," said Bank of New Zealand economist Craig Ebert.

"It confirms the anecdotal evidence we have been hearing, that there's a lot of wage inflation pressure out there. These are enormous numbers."

ANZ National Bank economists said they expected the Reserve Bank to raise the official cash rate 25 basis points to 7.25 per cent on December 8 and to leave the door open to another move after that.

But Westpac chief economist Brendan O'Donovan said wages tended to follow inflation, not lead it.

"For a nervous Reserve Bank this will throw petrol on the flames. But they only have to worry to the extent they think higher costs will be passed on rather than absorbed in firms' profit margins and to the extent they think wages are more stimulatory than profits."

Fresh data on how tight the labour market is will come tomorrow with the release of the household labour force survey.

Economists are picking jobs growth of 0.3 per cent in the September quarter, enough to keep the unemployment rate at 3.7 per cent. That is well below the rate, around 5 per cent, at which economists estimate it puts no upward pressure on inflation.

The quarterly employment survey released yesterday recorded a jump of 7.3 per cent in total gross earnings in the year to September, reflecting the combined effect of more jobs and higher wages.

That is up from 6.3 per cent in the year to June.

Going up

Wage inflation is gathering pace, which is:

Good news for

Wage and salary earners, who are paid more.

Retailers whose customers have more to spend, but:

Bad news for

Employers, whose costs are rising.

Consumers facing higher prices as a result.

Borrowers, who face higher interest rates.