The Wage Price Index (WPI) shows wages are up. So why doesn't it feel that way?

The latest figures from the ABS show wages are growing at a reasonable rate, but a deeper look shows a big problem might be about to bite Australian workers.

The Wage Price Index (WPI) was released on Wednesday and is a measure of how fast wages are increasing. It showed that wages increased 3.4% over the past year, which was the same as the annual increase from last quarter.

An annual growth rate of 3.4% is reasonable. The long run average is 3.1%, so it’s slightly above average. However, as the graph below shows, the growth rate in wages has fallen since it peaked at the end of 2023.

The Reserve Bank will certainly be happy, as they firmly believe that higher wages are a cost for businesses, who will push up prices in order to protect their profits. For the Reserve Bank, higher wages lead to higher inflation.

So, does that mean the cost-of-living crisis is behind us?

Not so fast. Wages growth is only part of the picture. What people should really be focused on is what economist call real wages.

Real wages is a measure of how much stuff you can buy with your wage. This takes account of not just how much your wage has increased by but also how much the prices of the things you buy have gone up by. Inflation is usually measured by the consumer price index (CPI).

Let’s use a simple example. Imagine wages have risen by 5%. That’s a big increase in wages. Workers must be really happy. But if inflation, the prices of the stuff people are buying, has increased by 10%, then workers are actually worse off. Sure, their wage went up, but prices have gone up even faster. This means they can now buy less stuff.

In this example real wages have actually fallen by 5% (5% wage rise minus 10% inflation rate). When real wages fall, that is when people feel the cost-of-living pain.

So, what are real wages at the moment? The WPI increased by 3.4% is not looking as great since inflation was 3.2%. Real wages were only 0.2%.

The graph below shows real wages over the last 20 years. We can see that most of the time they are positive. Before 2022 it was very rare to see peoples real wage go backwards. After 2022 we saw a huge fall in real wages, the largest and longest we have seen in recent history.

This was the period when households felt the financial squeeze. That is exactly what falling real wages mean. People can buy less stuff with their wage.

At the end of 2023, real wages started growing again. Things were finally improving. But in the latest quarter that has changed dramatically. Real wages have fallen from 1.3% to only 0.2%. Still positive but only barely.

Does this signal the beginning of a new cost of living crisis?

While it appears unlikely that wages are going to grow faster in the near future, the fall in real wages is because of a big increase in inflation in the last quarter. This was driven mainly by temporary factors, like the drop in state government electricity subsidies.

If inflation doesn’t increase further and wages continue to grow at the same rate, then real wages should stay positive.

You might have noticed there are a few ifs in that statement. Things can change quickly, and we don’t have a lot of wriggle room.

Making the whole thing worse is the Reserve Bank hovering in the background, sounding the alarm and threatening to put up interest rates anytime wages look like they might grow at a decent rate.

This is made all the more galling by the fact that at the same time they are worrying about wages growth, they are seemingly unconcerned about the rapid growth in corporate profits. Higher profits can also push up prices, a fact the Reserve Bank is happy to ignore.

Growth in real wages has slowed to a crawl. Hopefully things will pick up otherwise we might be in for another rocky ride.