1492490029036 - Jump in the cost of living may spark higher wage demands

Jump in the cost of living may spark higher wage demands

A jump in food and fuel prices is expected to see the cost of living increasing at the fastest rate since 2011, which could help kickstart bigger pay demands.

Figures out on Thursday are expected to show the consumer price index (CPI) – the official measure of household inflation – rose 2 per cent in the year to March 31, according to economists.

This would represent the fastest annual increase in inflation since September 2011, when the cost of living was artificially boosted by the National Government’s decision to raise GST to 15 per cent.

Over the past five years inflation has been low by historic standards.

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While wage growth has also been relatively muted, the labour cost index has been climbing faster than inflation, and the Government has trumpeted that real wages are increasing.

But if the cost of living increases as quickly economists expect, it will rise above the increase in the labour cost index – which rose 1.6 per cent in 2016 – for the first time since 2011.

BNZ senior economist Craig Ebert said rising inflation would probably feed into wage negotiations, which in a number of areas were linked – or indexed – to changes in the cost of living. 

“People forget that there is still a lot of indexation that runs through the economy…Because inflation has been so low there hasn’t been much ammunition for employees to go into bat for cost of living adjustments.”

Surveys showing increasing numbers of employers were struggling to find skilled staff could give employees greater power, Ebert said.

“Now that there are signs of skill shortages these sort of things can get some traction.”

Sam Huggard, secretary of the Council of Trade Unions, said inflation remained an important element in wage bargaining, especially when the economy was performing strongly.

“CPI is pretty important, in terms of how wage rates are stacking up,” Huggard said.

“Workers would see the economy well and truly in recovery mode, and it’s time to start looking at sharing that benefit.”

While the CPI measures a broad basket of goods, the main drivers of the recent increase are items which few households can avoid: food and fuel.

A sharp rise in the price of fruit and vegetables boosted food prices 2.2 per cent in the first three months of the year, while petrol prices jumped 6 per cent, according to economists at ASB.

In the last two years inflation has been running at the lowest level in decades, falling as low as 0.1 per cent in 2015, as a strong New Zealand dollar and low global oil prices saw the cost of goods in many sectors falling.

The Reserve Bank was forced to slash the official cash rate to an all time low to fend off the threat of deflation. As recently as September 2016, annual inflation was only 0.4 per cent.

The recent rise will be welcomed by the Reserve Bank. Governor Graeme Wheeler’s job is to keep inflation in a band between 1 per cent and 3 per cent, and as close to the middle of the target band as possible.

Thursday’s figures could mark the first – and possible only – time in Wheeler’s tenure that he has hit the 2 per cent target.

Some economists say the spike is fleeting, and will almost immediately drop below 2 per cent, with the spike in food and fuel prices creating a temporary boost.

ASB chief economist Nick Tuffley said inflation was likely to drift lower, however it was clear that the increases were moving back towards “normal” levels.

“There are a few one-off features that are artificially pushing this quarter’s inflation up, but pretty clearly we’ve broken away from those sub-1 per cent figures we were seeing.”

 

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