Don't blame Australia's lowest-paid workers if interest rates rise again

• The odds have been shortening on the Reserve Bank of Australia lifting interest again, and Australia’s workers are again being blamed for driving inflation.
• The Fair Work Commission granted a 5.75% increase to award wage rates, and an 8.6% increase to the minimum wage.
• But there are good reasons this decision won’t have a material impact on inflation or interest rates.

Limited impact on the wages bill

• And those workers, being low paid and often part-timers, only account for about 11% of the national wages bill.
• The Fair Work Commission’s decision, being 0.75 of a percentage point above market expectations, means the national wages bill will be only 0.08% (less than one-thousandth) greater than expected.
• Over the long run, the Fair Work Commission aims to increase wages in line with growth in prices and productivity.
• In this decision, though, real wages for even most low-paid workers are falling.

What about other workers?

• Some workers on enterprise agreements have received such low increases that award rates have caught up to them.
• It is so unlike the last large spike in inflation, in the 1973–74 wage-push period, that any comparison would be laughable.
• But by continuing to raise interest rates, it keeps on behaving as if a wages break-out is a real prospect.

Profits and prices

• Profits had been growing considerably faster than wages, both in Australia and overseas, though profits are now slowing down in both.
• But firms won’t chase cheap profits through hiking prices indefinitely.
• Sure, firms have the chance to raise prices more than they need, since customers expect price rises during shortages.
• So they can take advantage of a temporary supply shortage to permanently boost profits.

Inflation and interest rates

• So there is no reason for the Reserve Bank of Australia to raise interest rates again in light of the award wage decision.
• That does not mean the central bank won’t raise rates.
• After all, it increased interest rates last month while inflation was falling.