Economic summary: from week to November 19

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Do not hike

“Now is not the time to change
Relax, take it easy … “
-Cat Stevens, father and son

The curse of the day of rising inflation has increased volatility in bond and stock markets due to expected policy responses from the central bank to contain the surge in price increases.

Some central banks have already raised interest rates, others have “cut” their bond purchases, and the Reserve Bank of Australia (RBA) has abandoned its target of maintaining the yield on April Australian government bonds. 2024 to 10 basis points at its November meeting.

But overall, major central banks are following the narrative that the recent surge in inflation is transient. I tend to agree.

With the world freed from the pandemic lockdown, there is bound to be an increase in pent-up demand. Sadly, this is not met by an equal increase in production – crippled by supply chain bottlenecks, prompting businesses and consumers to offer higher prices.

But how are things going for Australia? The Australian Bureau of Statistics (ABS) update on the country’s wages suggests the RBA is correct.

The country’s annual total wage growth accelerated to 2.2% in the September 2021 quarter (up from 1.7% in the previous quarter) – it’s not something you write your mom and certainly not the type to persuade the RBA to raise interest rates. Especially since it is lower than the 3.0% growth rate that the RBA determines as the rate that would send consumer price inflation higher.

The RBA believes it will be in the final months of 2023 before wage growth hits an annual rate of 3.0% – the rate at which it begins to push inflation up.

Wage growth is the key.

Remember Glenn Stevens’ statement when he was head of the RBA: “As wages are the most important component of business costs, the outlook for wage growth is particularly important for the outlook for inflation. . “

Ergo, the outlook for inflation depends on the outlook for wages. A question that Luci Ellis, deputy governor of the RBA (economy), tried to address during the ABE conference in February 2019: “How much and how fast are they going?” [wages] To recover?”

If you take a closer look, total wage growth could rise 2.2% in the year through the September 2021 quarter, but consumer prices rose 3.0% during the year. same period.

In short, nominal wage growth is eroded by inflation. Real wage growth – nominal wage growth (2.2%) minus headline inflation (3.0%) – remains negative at 0.8%.

You guessed it! Australian consumers would spend less as their wages increased, as higher prices would erode their purchasing power.

Slow wage growth leads to lower household spending, lower sales and corporate profits, and by extension, reduced economic activity and lower inflation.

The RBA would not want to fuel this vicious circle by making it more expensive to borrow to finance consumer spending.


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