Two points on WPI

The Australian Q1’19 Wage Price index again printed at 0.5%q/q (2.3%y/y). This is the 11th print in the ~0.5%q/q ballpark since 2015 — which is to say that it’s been ~0.5%q/q about two thirds of the time over the past five years.

The theory has it that labour supply curve slope upwards at some point — so as the unemployment rate falls, wage inflation accelerates. That may well be true, but it hasn’t worked recently. The experience of other countries suggests that a much lower unemployment rate might be needed.

The chart below shows the relationship between the unemployment rate (qtr average) and WPI inflation (%yoy). The grey points at the bottom are the period 2015+; the red dot is today. As you can see there has been basically no relationship between the unemployment rate and inflation over the past five years.

There used to be a better relationship. It was fairly stable up until 2008, and then actually steepened in the immediate post GFC period.

Or perhaps that was just wages collapsing due to the forces that are still keeping them down? It’s hard to say for sure.

Whatever the truth is, it’s not looking good for the RBA’s WPI forecast. They have 2.4%y/y for Q2’19, and given the low Q1 print they’ll need a ~0.7%q/q in Q2’19 to hit their prior forecast. We haven’t had a 0.7%q/q print since 2014!

I reckon we’ll get another ~0.5%qoq, which will make Q2’19 WPI ~2.2%yoy. So there’s another core CPI downgrade lurking for the RBA’s August SOMP.