The Reserve Bank of Australia's suspicion that wage pressure is accelerating is being confirmed by economic data, placing more pressure on interest rates.
The Australian bank bill futures market yesterday put the chance of a rate rise at the next Reserve Bank board meeting at 50 per cent, while a rate hike in the next 12 months is considered a certainty.
Early assessments by private sector economists suggest that March quarter inflation will push the annual rate higher, rather than lower as expected.
The RBA set interest rates to keep inflation between 2 and 3 per cent.
The Australian Industry Group's March quarter manufacturing survey, out next month, shows rising cost pressures on business.
AIG chief economist Tony Pensabene said yesterday that companies were also pushing up selling prices, although profit margins were still being eroded.
"Skill shortages and shortages of labour generally are putting pressure on companies to deliver wages either to reward or retain staff. There are also clear signs that the drought is having an impact on supply chains, and that has put some pressure on particular food sectors.
The AIG survey is consistent with the findings of the National Australia Bank and the ACCI business surveys.
The monthly NAB survey shows that both wages levels and spare capacity are at levels to raise concern at the Reserve Bank.
It shows the average wage rise increased from 4.5 to 4.75 per cent in the second half of last year, and moved to 5.25 per cent in both January and February.
NAB chief economist Jeff Oughton warns that the survey figures are typically about a percentage point higher than the official national wage price index, but they underscore the rising wage pressure.
Both the NAB and the AIG surveys show companies are running out of spare production capacity. These surveys are the only direct measure of how closely the economy is approaching the limits of its capacity and are closely followed by the Reserve Bank. The NAB survey shows business is operating at a record 83.9 per cent of its capacity.
The latest ACCI-St George survey shows that in the December quarter wage and other cost pressures were at their highest level since the survey began in 1994.
However, the business surveys show that cost pressures are not fully reflected in sales prices. The NAB survey shows retail prices are only rising at an annual rate of 1.9 per cent. Both AIG and ACCI surveys show a moderate lift in selling prices.
Westpac inflation expert Anthony Thompson said the headline rate of inflation for the quarter was likely to be 0.8 or 0.9 per cent, compared with the December quarter's 0.1 per cent fall in consumer prices.
"Petrol prices have ratcheted higher, whereas early in the quarter it had looked as though they might fall by an average of 4.5 per cent."
He said a very preliminary estimate suggested the core inflation rate for the quarter might rise from the December quarter's 0.5 to 0.7 per cent.
"Domestic demand, particularly from consumers, is proving extremely resilient to last year's rate hikes."
The monthly inflation index compiled by the Melbourne Institute and TD Securities shows that, excluding volatile items and housing rent, price pressure in February was the most intense in the past four years.
Source: The Australian
