Big pay rises not likely to follow NZ's jump in inflation, economists warn

Now might seem a great time to negotiate a wage rise, with a worker shortage and soaring inflation, but don't get your hopes up of a fatter pay packet, economists warn.

Prices are rising faster than they have in decades, which might be expected to result in big wage increases to compensate employees.

But wage inflation will not come close to keeping up with price inflation, despite the big demand for workers, said Matt Roskruge​​ (Te Atiawa, Ngāti Tama), associate economics professor at Massey University.

“I think we’re going to see a period of high inflation, I don’t think we’re going to see wages come up enough to drive that inflation - I think it's more the supply chain problems, global catastrophes and wars,” he said.

Wage inflation is not expected to come close to keeping up with price inflation.
Wage inflation is not expected to come close to keeping up with price inflation.

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Annual salary and wage costs rose 2.6% in the December quarter, measured by the Labour Cost Index, up from an annual rate of 2.4% the previous quarter.

That was well below annual inflation of 5.9% in the December quarter, which leapt to a new 31-year high of 6.9% in the March quarter.

A wage-price spiral was possible, with rising prices pushing workers to ask for more wages, which in turn pushes businesses to increase prices, but it was not probable, Roskruge said.

“I just can’t see that there’s an appetite to move wages even with the tight labour market and what should be a whole lot of power for workers to negotiate high wages.

“I think a lot of employers just don’t have the cash after Covid to offer higher wages even if they want to.”

A lot of people were instead negotiating working from home benefits, or in effect fewer hours and more flexible conditions. That was one way for workers to lower their costs in response to rising prices, not having to pay for petrol or work clothes for example.

“I think a lot of employers just don’t have the cash after Covid to offer higher wages even if they want to," says economist Matt Roskruge.
Dominico Zapata/Stuff
“I think a lot of employers just don’t have the cash after Covid to offer higher wages even if they want to," says economist Matt Roskruge.

Current rising inflation was the result of businesses passing on higher costs such as shipping, materials and minimum wage increases, and was not being driven by higher profits.

“The commercial sector’s pretty sore from Covid and it doesn’t look like farmers and growers are particularly rich in cash at the moment, I just don’t see anybody being able to offer the sorts of wage increases we’d need to see to get that spiral going,” he said.

It seemed to be driven by overseas factors outside New Zealand’s control.

“We just kind of need to weather the storm, support people where we can, make sure everybody’s able to access necessities but otherwise ride it out because markets will react quickly to any good news.”

Finance Minister Grant Robertson says some Government moves have kept inflation lower, even though it has hit a 31-year high.

ASB senior economist Mike Jones​ also did not expect to see a wage-price spiral, because the Reserve Bank would not allow it.

“We have an inflation-fighting central bank, and it reinforced those credentials with gusto last week. The real question is what will need to be sacrificed in the name of reining in inflation,” Jones said.

“In other words, can we avoid a recession and/or material house price correction as interest rates are pushed higher? On that score the jury is out.”

The bank raised its benchmark official cash rate by 50 basis points to 1.5% last week in a bid to head off inflation. Reserve Bank Governor Adrian Orr said earlier this week that all central banks faced the challenge of keeping a lid on inflation expectations without creating a recession.

Reserve Bank Governor Adrian Orr
Reserve Bank Governor Adrian Orr

“I think we’ve seen enough in terms of both actions and rhetoric from the Reserve Bank in the last week-and-a-half to say they’re focused on making sure we don’t see a wage-price spiral,” Jones said.

“They’re talking a lot about inflation expectations and trying to stop high inflation expectations becoming embedded, which is the first signs of a spiral.”

Meanwhile, essential bills such as food, housing, transport and mortgage payments were all rising, and had to be paid.

“We’ve seen the price hikes, we haven’t necessarily seen the wage hikes – we think they will come but the big question for everyone going down to the supermarket is will wage rises keep up with the higher cost of living? And at the moment they’re not.”

ASB has said households will spend an extra $150 per week, on average, on their living costs this year as rising costs put pressure on.

Michael Gordon​, Westpac acting chief economist, agreed that workers would take some of the hit.

“At least in the near-term, we’re not going to see wages keep up with this degree of inflation,” he said.

“It’s probably more of a story for next year when the inflation rate itself is going to be lower than it is today.

“That’s where the catch-up will happen, it’s not necessarily in terms of big wage increases as such, it’s more wage growth picks up, headline inflation comes down to some degree, and then we start seeing a balance.”