Wage inflation sharpens RBA dilemma

It is time the leaders of Europe accepted that a single currency and one monetary policy cannot cope with such a disparate collections of economies and allow the weaker nations to devalue and resurrect their own currencies.

With one of the world's stronger economies, the Australian dollar keeps rising, reaching another post-float record of 1.04 US$ overnight.

Australia's manufacturing sector contracted again in March, as it struggles with the increasing cost of raw materials and the impact of a strong Australian dollar.

The Australian dollar is up nearly 30 % against the U.S. dollar since June 2010. Massive capital inflows to stoke our resources sector is the principle reason.  With the economy already close to full employment, resources booming, and our own substantial spending to come on recovery from natural disaster, goods and services inflation beyond the Reserve Bank's target range is all but guaranteed.

The National Broadband authority has decided all 14 tenders for the next phase of its work were too costly and has paused in its rush to spend taxpayer's money. It is time to stop this costly white elephant in its tracks.

Wage claims are on the march, with a weekend report in The Age focussing (as it should) on the relationship between wages growth, goods and services inflation and productivity growth.

The two authors said: 'The Reserve Bank has had a threshold of about 4.5 per cent for wage growth - a combination of 2 per cent productivity and the 2.5 per cent midpoint of the central bank's inflation target range, according to Stephen Roberts, a senior economist at Nomura Australia in Sydney. That limit now was probably 4 per cent or lower, as productivity slowed to less than 1 per cent, he said'.

Yet Wages grew 3.9 % in the three months to December 31 from a year earlier, the fastest pace since the first quarter of 2009.

This is another case in which the Global Financial Crisis came just in time to save the Reserve Bank from the embarrassment of an inflationary surge.

The authors report a jump in wage claims of 15 % in the resources sector, according to a professional recruitment manager.

In addition: In February, the Construction, Forestry, Mining and Energy Union sought pay increases of up to 24 % over four years; The Communications, Electrical and Plumbers Union is seeking annual pay rises of 5 % over the next three years, almost double the inflation rate.

The Board of the Reserve is on the horns of a sharp dilemma. Its senior officers have signalled (deliberately or otherwise) no immediate rate hikes are in prospect.  Its non-executive directors will worry more about obstacles to growth than the threat in inflation.  Its  ex-officio member, the new Secretary of Treasury, has to decide if he is an independent-minded inflation hawk like his distinguished predecessor, John Stone, or a Treasury official loyal to the party who appointed him.