The ABS wage price index for the September quarter was released today, and the upbeat figures point to a robust labour market and wage negotiations.

The quarterly result hit 1.3%, the strongest figure since the records began in 1997, but was broadly in-line with market expectations.

With quarterly CPI inflation at 1.2%, wages growth beat the rise in the cost of living from July through September.

The private sector posted its strongest annual result - 4.2% - since March 2008, while the public sector's 3.5% was the strongest since June 2011.

"Almost half (49%) of all private sector jobs recorded a movement with the average increase being around 5.8%, said Michelle Marquardt, ABS' head of prices statistics.

"This is compared to the public sector where 34% of jobs recorded an average pay rise of 3.3%.”

The September figure is usually stronger than other quarters given many end-of-financial-year bonuses and raises take effect, and while the quarterly result was about consensus, economists are highlighting its strength.

The question is: To what extent will this impact the Reserve Bank's monetary policy decisions over the next few months?

The RBA expects annualised wages growth to hit 4% by the end of the year, and sustain until June 2024 before tapering off.

Economists said this strong result was largely a 'one off'.

The ABS attributed this to the Fair Work Commission's annual wage review of 5.75%, and the Aged Care Work pay rises; the bureau also said some work places are giving 'cost of living' pay increases.

"We don’t expect today’s data will change the RBA’s thinking ahead of its December meeting, where we expect the RBA to hold the cash rate at 4.35%," ANZ economists noted.

NAB economists said the wholistic WPI figure won't shift the needle of the next RBA rate hike forward to December, but have stuck by a February call (the RBA board does not meet in January). 

Bonuses and extra payments driving growth

NAB notes growth is being seen in bonuses and other extra forms of renumeration. 

"It is not base wages growth in isolation that is sustaining very elevated labour cost pressures and underpinning elevated services inflation," NAB senior economist Taylor Nugent said.

"Hours worked has outpaced activity growth, meaning productivity has been falling and unit labour costs growth has been strong."

In original terms, the index for total hourly rates of pay including bonuses posted a 2.6% growth rate over the quarter. 

This was stronger than the growth rate at the same time last year at 2%, and in 2021 at 1.1%.

This index is also 5.9 percentage points higher than a year ago.

"The risk remains that the outlook for wages growth proves a challenge to the ‘last-mile’ of disinflation in Australia," Mr Nugent said.

Productivity on the RBA radar

There are now bigger fish to fry at Martin Place than strong base wages growth - the growing cost of labour hours worked, and falling productivity.

The RBA is cognisant of increasing labour costs not matched by output, as outlined in its latest Statement of Monetary Policy:

"Inflation could also moderate more slowly than anticipated if productivity growth does not pick up," it read.

"This would increase labour costs by more than expected given the current outlook for nominal wages and so add to inflationary pressures."

So, what is productivity and why isn't it where the RBA would like?

In his appearance on the Savings Tip Jar podcast a couple months ago, Callam Pickering, senior economist at Indeed - the job hunting website - explained why.

"The fact that the unemployment rate is now so low, could be a reason. So we're bringing in perhaps some of the less productive workers, and maybe they're not performing at the same level as existing workers," Mr Pickering said.

This could change however with a strong uptick in immigration, and over time a natural balance in skills shortages will happen.

"We'll all look back from the vantage point of 2025 or 2026 ...  you won't have jobs going unfilled for six to 12 months, and businesses will start to operate the way they should.

"Now there's just too many roles that are being unfilled for very long periods of time, making it difficult for them to operate at full capacity, and operate the way they should." 

Labour force data - the unemployment rate - for October is delivered tomorrow at 10.30am AEDT.

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