Rapidly rising wages stoke central bank inflation fears

Wages are rising at the fastest clip for 13 years - not fast enough to keep pace with inflation but enough to keep the Reserve Bank nervous and interest rates high.

Salary and ordinary-time wage rates rose 3.3 per cent in the year ended June, Statistics New Zealand reported.

Over the same period inflation was 4 per cent and the Reserve Bank expects it to remain around that level for "several quarters" and not fall back below 3 per cent until late next year.

"Workers are feeling the pinch with house prices outstripping wages, high transport and electricity costs and a recent period of very high fruit and vegetable prices," Council of Trade Unions economist Peter Conway said.

The overall increase in pay rates was boosted by the public sector, which was up 4.2 per cent reflecting rises for teachers, while the private sector increase was 3 per cent, unchanged from three months ago.

These figures are diluted by the fact that 40 per cent of wage and salary rates did not increase over the past year. Looking at the other 60 per cent which did increase, the average rise was 5.4 per cent.

And the median increase was 4.2 per cent, which means there were as many rises above that figure as below it.

These are the largest increases since these statistics began in 1992.

Reserve Bank Governor Alan Bollard has warned about the risk that high inflation will push up wages and that firms will try to recover those increased costs by raising their prices, creating more inflation.

He is not expected to start cutting the bank's benchmark official cash rate, which is among the highest in the developed world, until well into next year.

But for most people with home loans it is international interest rates which matter, since the money banks use to fund fixed-rate loans is mainly imported.

World interest rates are rising as central banks around the world grapple with mounting inflation. Fixed-term mortgage rates here have been rising accordingly.

There was some good news for Dr Bollard in yesterday's figures, however.

At least in the private sector, the increase in salary and ordinary time wage rates in the June quarter at 0.6 per cent, was down slightly in March and the lowest for a year.

"We are not reading too much into that slightly softer result," said ANZ national bank chief economist Cameron Bagrie.

The labour market was still tight and the Reserve Bank's concern that people would demand and get higher wages to compensate for inflation remained, he said.

But businesses are reporting that it is not quite so difficult to get skilled people as it was. Historically that has been a pointer to weaker wage growth down the track.

Deutsche Bank chief economist Darren Gibbs said wage inflation was likely to remain high for the rest of the year, then begin to ease gradually next year.

"The extent of the easing will depend on how successful employers are in rejecting employees' requests for full compensation for the high rate of headline inflation over the next 12 months," Mr Gibbs said.