MNI: Low Productivity To Extend RBA CPI Timeline- Ex Staff

Low productivity growth coupled with the Wage Price Index level will pressure the Reserve Bank of Australia to reconsider its current timeline for returning underlying inflation to the top its 2-3% target band by Q2 next year, former RBA staff told MNI

“While it’s noisy, the continued poor productivity performance means that current [Wage Price Index] growth unfortunately is unlikely to be consistent with the inflation target,” said Tim Robinson, senior research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne and former RBA economist, pointing to Q3’s 0.8% q/q WPI and the 0.5% q/q fall to GDP per hours worked within last week's National Accounts data.

The RBA was focused on productivity growth in the near term and its implications for understanding wage outcomes, he added. “If WPI growth was to moderate slightly further then the RBA would be more comfortable,” he continued. Q3 non-farm unit labour costs increased by only 0.6% q/q, but were 3.9% higher y/y, he noted. “While that’s a step down from 5.1% in Q1, the RBA would want at least the 0.6% [q/q] repeated in Q4." 

The Australian Bureau of Statistics will publish its Q4 WPI on Feb 19, the day after the RBA’s February meeting concludes, and the Q4 National Accounts in March. 

RBA overnight index swaps brought forward a 25-basis-point cut to the April meeting following last Wednesday’s Q3 National Accounts, which showed GDP grow below expectations at 0.3%. While the market pushed that back to May over the week, it has again now fully priced in an April cut. 

“April is a possibility if those signs of a moderation in wages growth eventuate and growth is subdued, but July seems more likely,” Robinson argued. Q4 trimmed mean at 0.5% q/q would bring a cut forward, but 0.7% q/q and above would mean year-ended underlying inflation remained above the band mid-next year, he added. 

While poor Q3 and Q4 productivity growth will influence the RBA's forecasts over the longer term, the lag means the effect will not immediately impact quarterly inflation results, economists told MNI. (See MNI INTERVIEW: Q4 CPI On Track To Surprise - Ex-RBA Economist)

The moderation in unit labour cost growth within the data – which fell 1 percentage point to 0.5% in Q3 – would also help lower supply-side inflation in Q4, depending on the lag, said Luke Hartigan, former RBA economist and lecturer at the University of Sydney.

MISSED FORECASTS

The RBA does not target GDP growth and this week’s lower-than-expected result will not influence the board’s future decision as much as productivity growth, said John Simon, adjunct fellow at Macquarie University and head of the economic research department at the RBA between 2014-2024, adding the productivity result will have implications for the Reserve’s inflation forecast.

The RBA was also unlikely to meet its target of productivity growth returning to pre-pandemic levels within two years, he added, pointing to November's Statement on Monetary Policy which has the metric at 1.1% by Q4 2025 onwards.  

“The economy is just barely ticking over and there's nothing obvious that really breaks us out of that,” Simon said. “The RBA doesn't want to raise interest rates, which means it's not really going to be having a strong effect on inflation over the coming period. So that's only going to drift down modestly.”

The RBA would instead push out its inflation timeline in February’s statement, a pattern it has repeated over the past three years, Simon explained. “It's never much at any one time, and between any two forecast rounds, you'll notice a little tweak here, a little tweak there. But cumulatively, it all adds up and we're still not there yet.”

The RBA’s November forecasts have trimmed mean inflation reaching 3% by Q2. 

Simon criticized the Reserve’s gradual approach to high inflation, noting any price shock arising next year will place greater pressure on its forecasts. The RBA placed a premium on short-term labour market outcomes over a long-term plan, he added. “But what you're left with then is higher inflation and more persistent inflation, and then at some point comes the day of reckoning.”