CBA's team of economists today:
"Overall, the WPI and AWOTE data are telling policymakers and markets that broad-based wages were running at just under 4%pa in QIV 2010. This is just below the zone of 4½% or above that starts to jangle RBA nerves about the deleterious impact on inflation of too robust wages growth. But watch this space, with the labour market expected to continue to gain momentum this year and 2012 on the back of the current terms of trade boom, a key inflation risk is sharply intensifying wage pressures. The national unemployment rate looks set to drop below 5% in the coming months and head toward the mid 4’s in 2011/12.
In this environment there is a clear and present danger that wage pressures will threaten the inflation target for the first time in two decade, i.e. since the late 1980s before the deep 1990/91 recession. On this score, private sector business surveys are indicating that some skilled labour areas are facing rising shortages, particularly in the mining and construction sectors. These risks to inflation from tightening labour markets, in an environment of accelerating economic activity, is likely in our view to see the RBA lifting the cash rate to 5½% by the end of 2011 to help short-circuit these pressures."
