Prices to outpace wage gains until early 2024: RBA

In its latest economic outlook, the Reserve Bank said acute labour shortages were giving workers the leverage to negotiate increasingly significant pay increases.

It has forecast the wage price index will accelerate to reach an annual growth rate of 4.2 per cent by the end of this year and remain above 4 per cent for most of 2024 before easing gradually to 3.8 per cent by mid-2025.

But although workers are expected to achieve their biggest nominal pay gains in more than a decade, the pace of inflation means they will effectively be losing ground throughout this year and will only begin to see improvement in their purchasing power in the first half of next year when the central bank expects headline inflation - which reached 7.8 per cent last quarter - to slow from 4.8 per cent to 3.6 per cent.

The outlook means households can expect limited relief this year from the financial squeeze caused by soaring living costs and high interest rates.

But Treasurer Jim Chalmers seized on the Reserve Bank's assessment that the federal government's intervention in energy market meant price pressures were lower than they would otherwise have been.

In its quarterly Statement on Monetary Policy, the RBA said that "energy price increases are likely to be smaller than previously assumed, reflecting the expected impact of the Australian government's Energy Price Relief Plan."

Dr Chalmers said the RBA's remarks confirmed that the government's energy plan would "take some sting out of high power prices".

But Opposition treasury spokesman Angus Taylor accused the government of breaking a promise to reduce power bills.

"The government promised lower electricity prices. Australians are not seeing that and it's clear they won't see that," Mr Taylor said.

Earlier this week, RBA governor Philip Lowe acknowledged that many families were under significant pressure.

"Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living," Dr Lowe said in remarks accompanying the announcement of a 0.25 of a percentage point lift in the official cash rate to 3.35 per cent.

But the central bank reiterated that its overriding focus was to bring inflation down to within its 2 to 3 per cent target as quickly as possible.

"High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people's expectations, it would be very costly to reduce later." the RBA said.

A key concern for the Reserve Bank is to prevent elevated inflation expectations becoming embedded and feeding into bigger pay claims, triggering a damaging wage-price spiral.

In its liaison with 200 businesses, industry groups and community organisations, the central bank has detected that higher inflation is already factoring into wage negotiations and "is likely to contribute to a pick-up in wages growth in the period ahead".

It said base wage growth in the private sector accelerated from 3.5 to 4.5 per cent in the second half of 2022 and around a third of firms reported wages accelerating beyond 5 per cent.

The central bank said that not only were the number of wage increases in the sector more common than usual but "the average size of increases was ... larger than it has been in over a decade".

At this stage, employers expect the pace of wage growth to stablise at around 4 per cent, but the central bank is alert to the risk that if they grow too fast they could worsen the nation's inflation problem.

"Given the importance of avoiding a price-wage spiral, the [RBA] board will pay close attention to both the price-setting behaviour of firms and the evolution of labour costs in the period ahead," it said.

An important factor in its favour is an anticipated slowdown in growth, from 2.7 per cent at the end of last year to 1.4 per cent by the middle of 2024.

The RBA expects this will cause demand for labour to moderate, resulting in the unemployment rate edging up to 4.4 per cent by mid-2025.

The loosening of the labour market is predicted to help limit the pace of wage gains and curb consumer spending, ultimately easing inflation.

But the Reserve Bank warned that the effect of high inflation and cost-of-living pressures on the setting of prices and wages was "a material risk to the outlook".