English: Smaller wage increases on the table due to low inflation

Finance Minister Bill English. Photo / Jason Oxenham

Finance Minister Bill English says wage increases, especially in the public sector, may have to be smaller than previously expected with inflation running so low.

Over the past four years, the average wage had increased from around $49,500 to $55,000 and wages were still expected to outpace inflation.

"But if inflation remains low, the dollar value of future wage increases may be smaller than previously expected," Mr English said today.

"This is particularly true in the public sector. Lower inflation means the Government will have to work even harder to control its spending to get its books back in surplus, so public sector wage rises will remain restrained."

He made the comments after Statistics New Zealand released figures showing inflation was just 0.8 per cent for the 2014 calendar year.

In the three months to December, New Zealand experience negative inflation with the consumer price index falling by 0.2 per cent.

Lower inflation makes it easier on the Government's expenses, but just as high inflation usually means higher revenue for the Government, low inflation is a brake on Government revenue.

Mr English said the Government's fiscal constraint had helped to reduce inflationary pressures.

"This is allowing interest rates to stay lower for longer, which is enabling more household savings, and creating better conditions for investment and exports."

The current economic conditions meant that households with mortgages had the extra benefit of lower mortgage servicing costs and low cost of living rises which would be welcome in regions with increasing house prices.

But CTU economist Bill Rosenberg said rising house costs were a big worry despite the fall in the CPI in the December quarter. And he said low consumer price rises are not a reason for low wage increases.

"People are due a catch-up in a growing economy where real wages have not grown as fast as the economy can afford."

That was particularly true for low and middle income earners who had had lower increases in incomes and faced higher inflation.

"Lower prices for petrol, diesel, vehicles, computers and other items also reduce costs for firms, making pay rise more affordable," he said.