How the minimum wage hike, rising oil prices and food costs are complicating the Reserve Bank’s inflation fight
The Central Bank’s job of reducing inflation has been made even more difficult by the Fair Work Commission.
However you express it and whatever the reasons, the 4.75 percent increase in the minimum wage is a risk that the economy and the Central Bank do not need.
If you think 4.75 percent is pretty big, that’s because it is. This is the third largest increase since the Global Financial Crisis (during which the commission’s predecessor, the Fair Pay Commission, had frozen wages for the lowest paid).
In dollars and cents, it increases the full-time minimum wage beyond the $1,000 mark to more than $52,000 a year. An important caveat is that approximately 70 percent of minimum wage earners are part-time workers with a large daily wage.
Although around a fifth of the workforce is affected, their wages are so low that they account for only 11 per cent of the national wage bill.
But the increase is so large that it would provide a measurable increase in the Federal Reserve’s key measures of wage growth and labor costs.
Just three weeks ago the RBA predicted wage growth would remain around 3.2 per cent over the next 18 months.
The minimum wage increase will definitely push that up. The question is how much. That’s the problem.
For example, AMP economist My Bui predicts that wage growth could reach 3.7 percent by December, further increasing already high inflation due to higher labor and input costs for businesses.
He believes the reserve will now raise official interest rates to 4.85 percent by November. This means two more interest rate hikes in addition to the three interest rate hikes that are just starting to move forward in the economy.
Cumulatively, this will amount to an interest rate of 1.25 percentage points in less than 12 months. For a $600,000 mortgage, that’s an extra $500 per month or $6,000 per year.
Outside of the end of the pandemic, you’d have to go back to the early 1990s (when the average mortgage amount was just $81,500) to see a similarly intense tightening of monetary policy in such a short period of time, when the Federal Reserve raised the cash rate from 0.1 percent to 3.1 percent between May and December 2022.
Most other economists are not so pessimistic about the effects of the Fair Work Commission decision. While slightly higher than expected, many think it will only marginally increase the economy’s inflation risks.
That’s the problem. Although inflation was slightly lower than expected in April, it remained at 4.2 percent, while headline inflation rose to 3.4 percent.
Nearly all risks to inflation remain upside due to Donald Trump’s ongoing war against Iran and continued economic health.
Exxon’s boss warned this week that the chances of oil rising to $160 a barrel increase for every day the Strait of Hormuz remains closed.
Oil producers such as Exxon are increasingly uneasy, knowing that the risk of a global recession and diminished demand for their oil increases as ships stop sailing in and out of the Persian Gulf.
It’s not just oil. Australian consumers are literally months away from being shocked at the supermarket and local cafe.
The combination of dry conditions in the country’s key agricultural regions and rising oil and fertilizer prices means the national crop this season will likely be down 20 percent from 2025, the federal government’s agricultural forecast revealed on Tuesday.
Prices for Australian grains and oilseeds have risen 20 per cent since the war against Iran began. However, the price of urea, an important fertilizer, increased by 80 percent. And diesel, although it has eased in recent weeks, is still 30 percent more expensive than before Trump’s war.
The only “upside” for the bank is that the housing market is turning around. Sudden declines in house prices will reduce the spending tendencies of consumers and thus reduce the pressure on inflation to some extent.
But the Fair Work Commission even eased the downward trend in consumer prices by increasing minimum wages without any productivity trade-offs or improvements.
Those who suffer the most from inflation are the lowest-paid segments of the country. They are the ones who have very little left in their bank account after a week of spending on basic needs like gas, food, rent, etc.
They are the ones left behind by the gap between wage growth and inflation over the last five years.
A big increase in wages might provide some short-term gain, but the Federal Reserve could easily turn it into long-term pain.
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up for our weekly Inside Politics newsletter.
Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
