The RBA has made worrying predictions about how long it will take for wages to catch up with inflation – and no wonder we all feel so poor.
Since the start of the election campaign more than five weeks ago, the Coalition and the Labor Party have both placed the cost of living and the future of the economy at the center of their respective strategies.
For the Coalition, this is very familiar territory, with the Morrison government operating on the same political narrative of superior economic management that the Liberal Party has relied on for more than 25 years.
Meanwhile, Labor has asked the electorate to look at their own household results rather than economic growth or unemployment figures to determine how the economy is working for them.
It’s no secret that Australians have quickly found themselves falling behind in the cost of living in recent months. But with inflation expected to continue to outpace wage growth for several years to come, perhaps the more important question is how long will it take people to catch up?
In order to explore how long this might take, we will look at inflation-adjusted wage growth in the years leading up to the pandemic to get some kind of benchmark of the level the economy is capable of producing.
For the purposes of today’s comparison, we’ll be looking at a snapshot of inflation-adjusted wage growth over the 5 years prior to the pandemic. During this period, inflation-adjusted wages increased by about 0.3 percent each year.
Since inflation started significantly outpacing wage growth from the December 2020 quarter, households have been rapidly falling behind the rising cost of living.
Between the end of 2020 and the end of the March quarter of 2022, inflation exceeded wage growth by 2.75%.
Forecasts of what lies ahead for wages and inflation
According to the latest RBA forecast, inflation is expected to outpace wage growth through December 2023. Inflation is expected to outpace wage growth by a peak of 2.9% in December 2022.
Aside from a few brief examples and the introduction of the GST, Australians haven’t seen their wages fall so rapidly in decades.
But there may be something of a silver lining for workers. The RBA has repeatedly underestimated the strength of the ongoing economic recovery from the pandemic and its track record in forecasting wages is not fantastic.
Since 2010, they have repeatedly overestimated the strength of wage growth, so their incorrect predictions would not be unprecedented.
How long to catch up?
If the RBA’s forecasts for inflation and wage growth are correct, by the end of their forecast period in June 2024, inflation would have outpaced wage growth by around 3.8%. It should be kept in mind, however, that this is based on an acceleration in wages above wage growth from the December 2023 quarter.
In order to explore how long it will take for our relative purchasing power in inflation-adjusted terms, we will look at two scenarios. In the first, inflation-adjusted wages increase by 0.3% per year, the same rate as before the pandemic. In the second, we’ll take the more positive RBA forecast of 0.8% per year.
According to the RBA’s positive scenario, wages would catch up with inflation in early 2029, assuming constant real wage growth of 0.8%.
In the scenario of the pre-pandemic trend of real wages increasing by 0.3% per year, wages would catch up in 2036.
The long term outlook
With all the different issues facing the world and Australia right now, predicting where things are going with any degree of certainty is a challenge at best, at worst a venture where the predictor risks ending up with an egg in their face .
But if we are to take the RBA’s forecast at face value, inflation and the cost of living could remain burning issues well into the end of the decade and perhaps beyond. Even in the most positive scenario where real wage growth improves by more than 250% from its pre-pandemic trajectory, we may not see 2020 purchasing power levels until the end of the decade. .
While Labor has pledged a strong focus on increasing wage growth, even under some of the most ideal conditions in decades, defined by low unemployment and the reversal of the balance migration, the best the economy could achieve was a meager 2.4% wage increase.
This environment will have to change dramatically if Australians are to hope that their wages will keep up with inflation if it takes root as it has in the past.
Whether it’s Scott Morrison or Anthony Albanese who hold the reins of power from Sunday, they have their work cut out for them to pull Australian households out of the huge hole that inflation has dug for us.
Tarric Brooker is a freelance journalist and social commentator. | @AvidCommentator