By BRIAN FALLOW
Inflation is going up ... but don't ask for a pay rise to compensate.
That, says Reserve Bank Governor Don Brash, will only make it worse.
Inflation is expected to rise to 3 per cent, partly because of higher petrol prices.
And Dr Brash says the bank's ability to hold down interest rates will depend on workers' willingness to restrain their pay demands.
"When the international price of oil goes up we New Zealanders become poorer," he told a business audience in Paraparaumu yesterday.
"It is utterly futile to suppose we can compensate ourselves for that fact by giving ourselves higher incomes."
Dr Brash has already raised interest rates two percentage points since November to combat inflation, and financial markets feel that little or no further increase is warranted at this stage.
Economists expect annual inflation to be around 3 per cent by the end of the year, up from 2 per cent now.
About half that comes from factors which Dr Brash cannot influence and is not supposed to react to, such as the international oil price and higher tobacco taxes.
But he said he could ignore these "one-off shocks" to the inflation rate only if they did not fuel a general and lasting increase in inflation through everyone trying to increase prices or wages to compensate.
Those who gained such a rise would be doing so at the expense of other New Zealanders, "since in aggregate we are all worse off."
Council of Trade Unions secretary Paul Goulter said it was unfair and unrealistic to expect workers to ignore inflation when negotiating wage increases.
"A recent survey showed average wages for the past year increased 1.4 per cent while chief executives got an average of 5.4 per cent," he said.
"The rising cost of living is not the only factor putting pressure on wages. Skill shortages are a major factor in some industries."
Remuneration consultant Kira Schaffler said senior managers in medium-sized and large companies would probably get pay increases of between 5 per cent and 6 per cent in the coming year.
In many cases, the increases would be tied to performance.
Executives and senior managers had had similar increases for the past two to three years, she said.
The next level of managers on individual employment contracts could expect pay increases of between 2.5 per cent and 3 per cent.
Public service chief executives received an average salary boost of between 6 per cent and 7 per cent for the year to June 30.
Workers' pay packets increased 1.5 per cent in the year to the end of March, says Statistics New Zealand.
Partly because of the fragile state of business confidence, financial markets are not expecting Dr Brash to lift interest rates at the next review, on August 16.
The mainstream view is that even by the middle of next year, rates will be only a quarter of a percentage point higher than now.
Pay rise? Keep it down or we'll all go broke
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