For Kiwi shoppers and consumers, upcoming employment data could shed some light on the big picture with inflation. Photo / Alex Burton
For Kiwi shoppers and consumers, upcoming employment data could shed some light on the big picture with inflation. Photo / Alex Burton
While inflation has come off its peak, the pressures propping it up are not going away without a fight.
A persistently tight labour market and higher wage growth have been formidable forces.
Stats NZ will reveal on Wednesday labour market data for the second quarter, including the unemployment rate andwage growth, which will indicate whether some of those pressures have eased or not.
Economists are picking a slightly looser picture for the labour market in the second quarter.
Westpac, Kiwibank and ANZ are picking a 0.1 percentage point rise in the unemployment rate from 3.4 per cent to 3.5 per cent for the second quarter.
While it’s not unusual for the labour market to lag the broader economic cycle, the RBNZ will grow increasingly wary if the labour market response is looking tardy, ANZ economists said in a research note.
“The labour market is still at intensely inflationary levels and is expected to remain inflationary until 2024,” it said.
The rise in the unemployment rate is not for lack of labour demand, but a recovery in labour supply more than anything, Kiwibank economists noted.
“Firms are still showing strong appetites for labour, despite emerging signs of slowing domestic demand. And it’s an appetite being satisfied by the recent surge in migration.”
The Reserve Bank has effectively engineered a recession or slowdown by hiking the official cash rate, with a goal of unemployment ultimately rising.
Yet rising unemployment has been slow to materialise so far.
In its May MPS, the RBNZ forecast the unemployment rate to peak at 5.4 per cent.
“The June quarter likely marks the beginning of the climb,” Kiwibank said.
Kiwibank is forecasting an upward trajectory for the unemployment rate to a 5-5.5 per cent peak in 2024.
Reserve Bank governor Adrian Orr will be keenly watching the latest labour market statistics. Photo / Mark Mitchell
Westpac’s Gibbs said such an outcome in the Q2 data on Wednesday would leave the RBNZ comfortable with its present policy stance.
He said a projected loosening of the labour market underpinned the Reserve Bank’s forecast that CPI inflation would move back into the target range next year.
“And with last week’s CPI pointing to stronger-than-expected inflation pressures in the non-tradables sector, the RBNZ will surely be keener than ever to see clear signs of a turning point in the labour market,” he said.
“However, we think the bank will want to see much greater progress in reducing labour market tightness in the second half of this year. Failure to see such progress would almost certainly raise the prospect of additional policy tightening.”
Meanwhile, the Labour Cost Index (LCI) - a measure of wage growth - is expected to have risen more than 1 per cent in the quarter, with annual wage growth likely to have now peaked.
“Annual wage growth has likely peaked. We expect wages jumped 1.1 per cent over the quarter, bringing the annual bill down to 4.3 per cent, from 4.5 per cent,” Kiwibank said.
ANZ is predicting a quarterly wage growth rise of 1.2 per cent, with annual growth also peaking at 4.4 per cent.
“However, wage-price spiral dynamics have not been resolved, and further moderation is necessary,” the ANZ said.
Westpac’s Gibbs said the lifting of the minimum wage in April was contributing to higher wages.
“However, for the most part, the lift in the LCI reflects the lagged impact of past tightness in the labour market. Significant declines in wage growth are more likely to be a story for 2024, rather than this year,” he said.
Westpac expects the LCI will increase 1.3 per cent in the June quarter, stepping up from the quarterly increase of 0.9 per cent in March, for “annual growth to a new cyclical high of 4.5 per cent”.
Food prices remain another inflationary factor not going away.
The Food Price Index (FPI) rose 12.5 per cent in the 12 months ended June, according to Stats NZ. On a monthly basis, food prices increased 1.6 per cent in June, higher than the 0.3 per cent rise between April and May.
CPI inflation peaked at 7.3 per cent in the June 2022 year and has remained stubbornly high since then.
The most recent data - for the June 2023 quarter - showed an annual CPI increase of 6.0 per cent, still well outside the Reserve Bank’s targeted rate of 1 to 3 per cent.
Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports.
