Wage inflation is tipped to rise, warn NZ economists

Private sector wage inflation is forecast to rise 0.6 per cent versus 0.3 per cent in the prior quarter. Photo / 123RF

Economists are expecting the second-quarter unemployment rate to remain steady but some say tomorrow's data may point to signs of wage inflation as the impact of a lift in minimum wage kicks in and migration slows.

The June quarter unemployment rate is expected to be 4.4 per cent, unchanged from the first quarter, according to the median of 14 economists polled by Bloomberg. Private sector wage inflation is forecast to rise 0.6 per cent versus 0.3 per cent in the prior quarter.

Benign inflation has kept interest rates on hold at a record low 1.75 per cent since November 2016 and led the central bank to signal no increases until well into 2019.

"The missing piece of New Zealand's inflation puzzle is wage inflation. Even as the labour market has tightened, with the unemployment rate now below what many would consider sustainable, underlying wage growth has remained muted," said Kiwibank chief economist Jarrod Kerr.

A common argument behind the weak wage growth has been the rapid influx of migrants boosting labour supply, but "net migration is now slowing, and we expect wage inflation to start climbing from here," he said.

Also, the Government's first major minimum wage hike towards $20/hr came into effect on April 1 and "in the public sector, we have seen a number of pay disputes hit the headlines, which may eventually spill over to private sector pay," he said.

BNZ's head of research Stephen Toplis also highlighted the impact of the lift in minimum wage, saying it will push the annual increase in labour cost inflation through 2 per cent, a level seen as consistent with the central bank's 2 per cent inflation target. "Many will play this down as an aberration but they will be missing the point," said Toplis, adding there are three more minimum wage increases pencilled in, each bigger than this year's event.

"Then there is the nurses' settlement, future pay equity settlements, the generally increased pressure on wages from staff shortages and heightened demands for compensation for rising CPI inflation, all of which is yet to be fully captured in the data."

Westpac Bank, however, downplayed in the impact.

"To date there has been little evidence that the tightening labour market has led to a pick up in wage pressures. And our forecasts assume that this remains the case in the June quarter. Although we expect a 0.5 per cent quarterly lift in the Labour Cost Index (LCI), the lift is mostly due to this year's larger than usual minimum wage hike and last year's aged care workers' pay equity settlement," it said.

It does expect wage inflation to "eventually start to drift higher next year".

ASB Bank chief economist Nick Tuffley also said "despite the lift in the minimum wage boosting LCI wages, wage distribution measures are expected to depict a generally contained wage inflation backdrop".

He expects the central bank "will want to be sure that wage growth will continue to firm before lifting the OCR, meaning rate hikes are distant".

ANZ Bank said it expects tomorrow's data to show a rise in wage inflation but as it is boosted by "temporary factors" it won't sway the central bank.