Strong unit labour costs continue to drive high domestic inflation
Strong unit labour costs account for the bulk of high domestic inflation.
A simple accounting exercise shows that strong unit labour costs - which the RBA has belatedly recognised as a key upside risk to consumer prices - continue to drive high domestic inflation.
Recently we replicated a simple analysis often undertaken by the ECB, where an accounting identity is used to measure the contributions of wages, profits and net taxes to inflation.
In this analysis, wages, profits and net taxes are all expressed in unit terms, which means that they are all divided by real output.
Unit wages are a simple measure of unit labour costs (i.e., labour costs adjusted for productivity), which are a major concern of the RBA at present. Net taxes equal taxes on production less subsidies.
Updating that analysis with information from today's national accounts, high domestic inflation – as proxied by the non-mining GDP deflator – continues to be driven by higher unit wages.
That is, non-mining GDP prices are up 7% over the past year, reflecting a 4.4pp contribution from higher unit wages, 2.3pp from unit profits and 0.3pp from unit net taxes.
The same is true for both household services and broad retail trade, which give a sense of the drivers of underlying inflation.
- In trend terms, the price of household services is up 8% over the past year, driven by a 5pp contribution from unit wages, 2pp from unit profits, and 1pp from net taxes.
- A 14% trend increase in retail prices reflects an 8pp contribution from unit wages, 5pp from unit profits, and 1pp from net taxes.
Unit profits make a larger contribution to retail prices than household services because this broad and volatile measure of retail trade includes petrol stations, which, like the largely foreign-owned mining sector, employ very few people.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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