Inflation tide breaches banks

Two thirds of the 23 Australian economists surveyed by The Conversation at the start of this year expected the nation’s benchmark interest rate would not rise until 2023.

Their average guess was that the Reserve Bank of Australia would only start lifting the official cash rate in April 2023.

But with national inflation at 6.1 per cent in the year to June, and Perth hitting 7.4 per cent, rates moved upwards much faster than predicted as the RBA embarked on a steep tightening cycle.

When the central bank started lifting rates in May, many commentators forecast moves to well above 1 per cent before the year was out, and eventually to 2.5 per cent.

By September, the benchmark rate was lifted a further 50 basis points to 2.35 per cent, and another hike is expected in October.

At the time of writing, ASX futures imply a likely cash rate of about 4.3 per cent by July 2023.

The challenge is sinking in as to just how hard it will be to get inflation back under control.

Financial markets rapidly readjusted, with the ASX 200 down 7.2 per cent in the month to the time of writing.

US Federal Reserve governor Jerome Powell has warned that a recession is possible as interest rates rise to fight inflation.

“We have got to get inflation behind us,” Mr Powell said.

“I wish there were a painless way to do that. There isn’t.”

But he said beating inflation was critical.

“Without price stability, the economy does not work for anyone,” Mr Powell said.

Understandably, much of the focus is on the direct impact through petrol, housing and groceries.

However, inflation also hits savers, whose nest eggs lose value, while businesses have less clarity on investment plans.

Mr Powell added that the historical record cautions against prematurely loosening policy.

He could well be referring to the 1960s and 1970s.

The US went through a series of economic cycles attempting to reduce inflation, switching course to focus on unemployment before settling the problem, only for it to re-emerge worse.

In Sydney, the RBA’s August meeting notes show similar thinking.

“[P]rice stability is a prerequisite for a strong economy and a sustained period of full employment,” the board said.

There are two key considerations for central banks in pushing so hard to stop inflation.

The first is that rising prices will eventually push up unemployment.

While it’s hard to pin the exact level, most economists agree there’s a point where falling unemployment will become temporary and only lead to prices rising (the non-accelerating inflation rate of unemployment).

The argument is that unemployment will automatically rise back to this level as workers and businesses start to anticipate price rises.

Central banks also know the task gets harder the longer they wait and the more they let inflation expectations set in.

To give an idea of the risk on that front, 30 per cent of respondents told a recent Chamber of Commerce and Industry WA survey they expected inflation pressure would continue beyond the next two years.

The most notable impact of rising prices has been on motorists.

Fuel prices were up 32 per cent in the June quarter on a year earlier, according to the Australian Bureau of Statistics.

Yet inflation was much more widespread (see table).

This surprise spike in inflation meant that real wages were hit hard.

In Western Australia, real wages fell by about 4.7 per cent using the bureau’s measures of consumer prices and its wage index.

It means a worker on the same pay as 12 months before would be substantially worse off in terms of the goods and services they can buy.

There’s been much debate as to what falling real wages say about the economy.

What is overlooked is that most businesses only assess pay annually, or even less regularly, with enterprise bargaining deals often locking in wages for years.

That means a sharp lift in prices will not flow immediately into pay as reflected in the wage price index.

Why?

RBA governor Philip Lowe has said the portion of goods and services in the consumer price index basket running above the 3 per cent target rate was at the highest level in decades.

Corporate profits were up 28.5 per cent in the June quarter compared to June 2022, according to the ABS.

Meanwhile, unemployment is at its lowest levels in decades, at 3.5 per cent nationally.

Retail spending in August was 25 per cent higher nationally than before the pandemic took hold in February 2020, seasonally adjusted.

A broader measure of spending – household consumption – rose 6 per cent from the June quarter of 2021 to June 2022.

Aside from the 12 months prior, which included the immediate recovery following the initial wave of COVID lockdowns, that was the highest growth in consumption since 2004.

Imports were 10 per cent higher in June 2022 than June 2021.

Those numbers show demand has been very strong in the past couple of years.

All of that indicates inflation was not simply caused by supply chain issues and trouble in oil markets.

It comes after the RBA’s balance sheet roughly tripled in size to more than $600 billion, substantially boosting demand.

That is generally correlated with inflation.

The bank bought a huge amount of government bonds, about $281 billion, which had the effect of keeping interest rates down for public debt and in the market generally.

Both the US Fed and RBA have tacitly acknowledged the impact by moving in recent months to shrink their balance sheets.

At the same time as the RBA was hoovering up government debt, the federal government embarked on a record spending campaign.

Despite unemployment venturing into record low territory and an inflation breakout building, then treasurer Josh Frydenberg unveiled a $78 billion deficit in his May budget Federal spending was to be $625 billion, and in just two years was expected to surpass the spending in the depths of the pandemic.

When all of this played out, demand for workers rose and a skills shortage emerged.

At the same time, inflation jumped, and real wages dropped.

Bargaining power

A growing list of ideas (of varying merit) has been floated, promising to either fix the skills shortage or lift wages.

Those have included extending subsidies for child care to families earning up to $530,000 a year; a new state government bureaucracy intended for workforce planning; and a return of nationalised employment markets.

Calls for multi-employer bargaining have been gaining traction in recent weeks, enabling unions to bargain with groups of employers jointly.

While it’s not clear the exact form such a policy will take, there are concerns it may give unions the power to force businesses into deals.

There have been big promises it will fill the gender pay gap and raise wages.

But the evidence so far is lacking.

Countries with multi-employer bargaining haven’t had higher wage growth, don’t especially have a lower pay gap, and, in Australia, women are paid more on individual arrangements than on awards or enterprise bargaining.

Real wages grew by an average of 0.7 per cent annually over the past decade in a group of 10 developed countries with multi-employer bargaining, according to University of Melbourne professorial fellow Mark Wooden.

In countries with enterprise-level deals, real wage growth was 1.1 per cent, Professor Wooden said.

Australia lagged both, at 0.4 per cent, although the system has both enterprise bargaining and centrally set award wages.

The US was the top performer.

“The industry [multi-employer] bargaining countries didn’t do any better,” Professor Wooden told Business News.

“There’s no guarantee industry bargaining will lead to higher wages.

“You’ve got to look for what’s causing low wage growth, and productivity is the number one candidate.”

Multi-employer bargaining was already an option in Australia, Professor Wooden said. Victorian nurses signed an agreement, although it was with state government-owned hospitals.

That represented a 9 per cent rise over four years, he said.

“Is that a good outcome? Now they’re locked in to 2024,” Professor Wooden said.

He said he was more comfortable with multi-employer bargaining when employers would agree to it voluntarily.

But it would also take competition out of wages.

“Imagine who would love this. Woolworths and Coles,” Professor Wooden said.

“One way to take out independent grocers, which they’re already doing with prices, is to force them to pay higher wages.

“You’re all forced to a common denominator.”

Nonetheless, the Combined Small Business Organisation of Australia agreed with union representatives in August to explore multi-employer deals.

Professor Wooden said it was also unclear women would do better through multi-firm deals.

As the economy becomes increasingly service based, particularly in sectors such as healthcare and social assistance, it would be tough to achieve the productivity gains that support wage growth.

He said the trend in sectors such as aged care had also been to focus on quality.

And all of that came as spending on services such as aged care are already set to rocket amid a push to lift standards and an ageing population.

Speaking at the federal government’s Jobs and Skills Summit, RMIT University’s Anthony Forsyth said industrial laws did not sufficiently promote collective bargaining.

“Boosting real wages requires a fundamental redesign, and a key reform is to move beyond enterpriselevel bargaining,” Professor Forsyth said.

“International evidence shows that countries with sectoral or multiemployer bargaining have much higher rates of agreement coverage, between 50 and 90 per cent of the workforce, than countries like ours with single employer bargaining at the enterprise level.”

In lower-paid sectors, multienterprise deals would bring employers and workers together with the funding body [the government], he said.

Evidence on sector deals fixing the pay gap is not clear.

Professor Forsyth cited European examples, including France and Italy, which he said had highly centralised systems.

The Netherlands, Denmark, Norway and Sweden had sector-wide minimums with firms making their own agreements above those.

Germany had sector-wide deals with opt-out clauses, he said.

Data from the European Union’s Eurostat office shows a wide range of performances from those countries on the gender pay gap.

In Italy, the gap was 4.2 per cent.

By contrast, France’s pay gap was 15.8 per cent, using Eurostat’s measure of average gross hourly earnings.

Other results varied from Germany at 18.3 per cent and Finland at 16.7 per cent, to Sweden at 11.2 per cent.

Australia has its own unique system.

There are more than 100 minimum standards across industries and professions, known as awards, in place of sector agreements setting minimums.

Enterprise deals are negotiated on top of those.

The awards system is an alternative to sectoral bargaining.

The government could instead commit to cover the cost of any big increases in the award rates in ‘caring’ sectors decided by the Fair Work Commission.

Adding to the uncertain impact on the pay gap is the variety of unions keen to take on industry bargaining.

“Multi-employer bargaining will help address some of the most serious problems Australian manufacturing workers face, such as exploitation, job insecurity, and unsafe worksites,” the Australian Manufacturing Workers Union said in late August.

Shell’s recent enterprise deal with Offshore Alliance workers at the Prelude FLNG project increased pay by between 30 per cent to 50 per cent, with employees to start on the platform earning more than $210,000 annually.

There are several factors that add to worker leverage in those deals, not the least of which was Shell’s estimated $1.5 billion cost of keeping its vessel offline for weeks during the dispute.

“If industrial action was allowed in pursuit of multi-employer bargaining, unions like the CFMMEU and other militant unions would use that power to achieve very substantial wage increases,” Actus Workplace Lawyers principal Stephen Smith said.

“That will exacerbate the problem of the gender pay gap.”

Care factor

A handful of other big considerations will arise as the government considers its position on multi-employer bargaining.

“Sector-wide bargaining would make our workplace system much worse,” CCIWA board president Nicolle Jenkins told Business News.

“There is a reason why, in 1993, Labor prime minister Paul Keating abandoned sector-wide bargaining rights in favour of enterprise bargaining.

“It was to drive productivity and real wages, and the proof was in the pudding.

“Productivity and real wages surged in the 1990s and early 2000s.

“It’s why both businesses and unions supported the move away from centralised wage bargaining.”

The system had since become more difficult to navigate, which Ms Jenkins said was partly driven by unions taking advantage of the system to sabotage agreement making.

“Workers would be the biggest beneficiaries of a reformed enterprise bargaining system, with more jobs, higher wages, and the option of a more flexible working life,” she said.

Driving up wages in care sectors will put pressure on the financial position of those businesses.

Aged care residential providers lost a combined $736 million before tax in the 2020 financial year, according to the Aged Care Financing Authority.

The year before, total pre-tax profit was $264 million, or a margin of 1.4 per cent.

Among approved aged care providers, the portion reporting a negative profit result was almost 63 per cent in the six months to December 2021, according to the University of Technology Sydney.

Employees are just more than 70 per cent of operating revenue.

Aged care cost the federal budget $24.6 billion in the year to June and was already projected to rise 34 per cent by 2026.

Inflation pressure and moves to lift wages will add to that bill. Disruption Actus Workplace Lawyers’ Mr Smith was previously head of national industrial relations policy at Australian Industry Group, where he worked more than three decades.

He has seen his fair share of industrial battles.

One involved car makers in 1999, when unions were pushing a template agreement across businesses.

“There was a huge battle,” Mr Smith said.

“We had a couple of disputes which completely stopped the car industry, the costs were absolutely enormous.

“If you extend the right to take industrial action beyond one workplace, the costs can be enormous, as was seen in industrial disputes in the past.”

Strikes for even several days would cost tens of millions of dollars, he said.

Mr Smith said there were many factors in the demise of the car industry.

“All those overseas head offices of those car companies could not have been happy about the huge losses,” he said.

“It certainly didn’t help.”

A return to large-scale strikes would also impact Australia’s position as a place for trade and investment.

“If we’re going to have an outbreak of industrial action in Australia like we’ve had in the past, it’s going to send the worst message to international investors,” Mr Smith said.

“It’s going to impact our ability to be a reliable supplier.”

But the biggest concern with multiemployer deals would be that they didn’t focus on the enterprise level, where productivity improvements could be achieved, he said.

“We need a safety net, and people can’t pay less than the safety net, but the idea of everyone paying the exact same wage is not in anyone’s interest.”