Australia’s Wage Growth Slows in Q4, Easing Inflation Pressures

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Australia's wage growth slowed to its weakest annual pace in over two years during the fourth quarter, even as unemployment remained close to historic lows. This suggests that the tight labor market is not driving significant inflationary pressure.

This development is expected to reassure policymakers that the labor market isn't adding to inflationary pressures, which had been a concern. The strong job market was one of the reasons the central bank was cautious about further rate cuts, having reduced interest rates for the first time in over four years just earlier this week.

The Australian Bureau of Statistics (ABS) reported a 0.7% increase in the wage price index for the December quarter, the slowest rise since early 2022 and slightly below the forecasted 0.8%. Over the year, annual wage growth slowed to 3.2%, down from 3.6%, marking the smallest gain since the third quarter of 2022. Private sector wages grew by 3.3%, while public sector wage growth decelerated sharply to 2.8%.

Oxford Economics' Sean Langcake noted that easing wage pressures contributed to a softer inflation outlook and helped justify the recent rate cut. He expects the labor market to soften in 2025, which should further slow wage growth.

The drop in public sector wage growth was partly due to the timing of labor agreements that fell outside the December quarter and some expired agreements with smaller increases.

Despite Australia's jobless rate remaining close to 4.0% for a year, inflation has eased from a peak of 7.8% in late 2022 to 2.4% in the final quarter of 2024. Over the past year, annual wage growth has decreased by one percentage point.

The Reserve Bank of Australia has indicated that while the labor market is still tight relative to full employment, it doesn't expect significant further tightening. As a result, it projects that underlying inflation will remain above its 2-3% target in the coming years. The central bank forecasts wage growth to rise to 3.4% by the end of the year, mainly due to anticipated public sector pay rises.

Market swaps show just a 16% chance of another rate cut in April, with expectations pointing to potential cuts in May or July.

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