While the RBA has kept its cool this month and held the cash rate once again at 4.35%, economists are still a little spooked for what lays ahead. Many have even updated their predictions, expecting cash rate cuts to be delayed.

The reason? While annual inflation did go down from 4.1% to 3.6% in March, it didn’t meet the RBA”s expectation of 3.5%. Geez, tough crowd! And while that’s not a very big difference, it seems the RBA is done being patient.

For the last two years, the RBA has been hard at work to push inflation down to its target of 2% - 3%. And by hard work, we mean lifting the cash rate.

And boy oh boy has the pressure been real. In fact, according to NAB, half of Australians have cut back spending on things like eating out, entertainment, car journeys to save petrol, holidays, and food delivery services.

With more Australians struggling with spending, it’s increased the pressure on employers and the government to increase wages and support Australians to keep up with the growing costs. 

You’d think that the wage increases are a good thing, but as it turns out, this has got some economists losing sleep, fearing the Australian economy could be in a wage-price spiral.

‍Wage-price spiral

The wage-price spiral is a cause-and-effect relationship between rising wages and prices that operates like a positive feedback loop. 

When prices rise, the demand for higher wages also rises. 

Higher wages means higher costs for businesses. As a result, businesses increase their prices to offset the higher costs, which puts even more pressure on prices, and causes inflation to increase further. 

When inflation goes up, it puts even more pressure on wages…and the cycle goes on and on and on.

There have been 79 recorded episodes of wage-price spirals in Australia, but on the whole they are short-lived. Only a minority of the 79 episodes actually lasted over two years.

What’s happened to wage growth so far?

Truthfully, there has been some reason to fear this wage-price spiral. In the September quarter last year, wages grew to a 26-year record high of 1.3%.

In fact, across the full-year of 2023 Australian workers saw their wages go up by more than inflation (yep, wages increased 4.2% over the year of 2023, while CPI increased 4.1%). 

That means Australians experienced a real annual pay increase for the first time in almost three years.

‍What’s happening to wages in 2024?

The good news, for those fearing a wage-price spiral, is that since then wages growth has slowed, and the RBA predicts that wage growth will continue to slow down over the coming year as the labour market has started to slacken.

Wages excluding bonuses are expected to increase 3.7% in 2024, down from 4.1% increase in 2023.

Ironically enough, part of this is due to increased migration. More migration has meant more people participating in the labour market and an increase in labour supply has kept wages competitive.

So while there’s been a lot of talk about how increased migration is causing higher spending, and therefore inflation, according to the RBA this has mostly been offset by migration containing wages.

But because inflation is still putting cost-of-living pressure on many Australians who need higher wages to support themselves, the Federal Government is pushing for minimum and award wages to increase. These wages are assessed and set each year by the Fair Work Commission, an independent body.

The government reckons there’s no sign of a wage-price spiral in the current economy, and says that soothing cost of living pressures is the bigger priority.