KEY POINTS:
Reserve Bank Governor Alan Bollard's foot is likely to hover closer to the brake than the accelerator after wage growth accelerated in the December quarter.
Statistics New Zealand's Labour Cost Index recorded a rise of 1.1 per cent in private sector ordinary time wage rates, pushing the annual increase to 3.5 per cent. It was the largest quarterly increase since the statistics series began in 1992 and stronger than the 0.9 per cent expected.
The index is a measure of underlying wage inflation because it is adjusted to exclude for increases in pay rates due to higher productivity.
The raw increase, before that adjustment, was 1.3 per cent in the quarter, or 5 per cent for the year.
Only 59 per cent of pay rates have been adjusted during the past year. Most of the increases (24 of the 59 per cent) rose between 3 and 5 per cent and most of the rest (21 of the 59 per cent) by more than 5 per cent.
Council of Trade Unions economist Peter Conway said a catch-up in wages was needed.
"The labour market has been tight for six years, yet wage growth has been modest to say the least."
Inflation is at 3.2 per cent and workers faced higher petrol costs and in many cases mortgage payments too.
"We need wages to rise to attract and retain workers and this level of increase will not add significantly to inflation pressures caused by food and petrol price rises," Conway said.
Westpac chief economist Brendan O'Donovan said the Reserve Bank's December forecasts implied a 0.8 per cent increase for the quarter - compared with the outcome of 1.1 per cent - and slowing wage growth from the middle of next year.
"Today's outcome is likely to make the bank feel very uncomfortable. The labour cost index is a very reliable and stable series that rarely gives false signals," he said.
"Wage growth has steadily accelerated over the past five years, reflecting a rising trend in underlying inflation. With wage growth now firmly entrenched about 3 per cent, the Reserve Bank should be very worried about its ability to deliver inflation between 1 and 3 per cent over the medium term."
ASB economist Daniel Wills said the economy's resources were stretched and that was unlikely to change any time soon.
"Firms appear shy of investing in plant and machinery in the current environment ... and with net immigration trending down since November 2006, labour shortages also look here to stay for some time."
ANZ National Bank chief economist Cameron Bagrie said labour scarcity would keep upward pressure on wage growth for some time yet.
"The historical relationship between the unemployment rate [currently 3.5 per cent] and wage inflation suggests elevated wage growth for the next 12 to 18 months."
