Wayne Cole

SYDNEY(Reuters) -Australian wages rose in the last quarter, as a tightening labor market encouraged intense competition. But annual growth still fell short of what policy makers believe is necessary to justify an increase in interest rates.

The Australian Bureau of Statistics released Wednesday’s figures showing that its WPI (wage price index) increased 0.7% during the December quarter. This was in line with forecasts, and is the highest increase since the end of 2013.

However, the annual rate rose to 2.3% despite forecasts of 2.4%. This caused a decline in the local currency. Private sector growth was 2.4% while public payroll growth was 2.1%.

While wage growth is back at mid-2019 levels, it fell short of the Reserve Bank of Australia’s (RBA), 3%+ level that was needed to keep inflation on target.

Also, it is below 3.5% consumer price inflation which means that real wages are going down.

The ABS includes wages for 18 industries. Accommodation and food was the only industry to surpass 3% in the last quarter. This is due to the shortage of labour from migrant workers with borders closing.

The national average pay claim has not exceeded 3% in 2013; there’s a lot more structural inertia than the award system. This is why the RBA thinks it can hold policy very loose until late in the year.

Markets aren’t so certain and long have priced in an increase in the 0.1% cash rates by June. The rate will reach 1.25% by year’s end.

With unemployment at 4.2% (a 13.-year record low), the labor market is tightening. This was evident after it fell sharply.

Supply bottlenecks, high commodity prices and cost pressures are all percolating throughout the economy.

Australia’s second-largest grocery store Coles Group (OTC-:) Ltd Tuesday said inflation has increased in the last quarter of last year and will continue through the first half.

Recently, the RBA signaled a shift away from solely focusing on wages, to include a wide range of measures that gauge price pressures such as unit labour costs, job shifting, bonuses, and industry liaison.

Catherine Birch (an economist senior at ANZ) stated that wage growth “everywhere, but in data” anecdotally. But, due to the shift of power in favor of employees, as well as the experience gained overseas, we believe that wage growth will reach 3% for the second quarter and 3.5% for the year.

“This confirms our belief that the RBA will increase its cash rate in the third quarter.”