The AFR's David Bassanese hit the nail on the head in a recent column with the following analysis. Bottom line: keep your eye on wages growth for an RBA rate trigger in the absence of "core" inflation pressures (yeah, that's the inflation measure that symmetrically strips out all the high and low growth stuff):
"Either way, the low rate of unemployment means one economic indicator that has lost prominence in recent years will storm back into the spotlight in 2011: wages. The pace of wages growth in the coming year should largely determine the pace at which the RBA will allow the economy to grow. Back in 2008 – before the global financial crisis hit – the unemployment rate briefly dipped to 4 per cent, and annual wage growth accelerated to 4.4 per cent. It’s why the RBA was keen to lift interest rates even as the global financial crisis was threatening the economy. With the GFC, annual wage growth then slowed – but over the past year it has re-accelerated to just under a 3.5 per cent annual pace. If it stays at this pace, the RBA is likely to remain content to see the economy grow at a “trend” pace of just over 3 per cent. Thus, it will remain comfortable with un-employment around current levels. But if wage growth continues its pace of acceleration and breaks to a 4 per cent to 4.5 per cent annual pace, the RBA may have to be even more aggressive with interest rates and slow the economy to a “below trend” pace of growth, ideally to 2.5 per cent or so. Most economists concede it’s hard to be certain [sic] how low the jobless rate can go without causing trouble. But, like pornography, they know it when they see it. In that regard, wages are the great litmus test – once wages growth accelerates too far, it’s strong evidence the unemployment rate has reached unsustainably low levels."
