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Workers and their wages are the collateral damage of the war on inflation

·5-min read

Whenever inflation begins to rise, the desire to blame wage rises is an itch that employer groups and those who represent them in politics and the media cannot resist scratching. The Fair Work Commission decision on Wednesday to increase the minimum wage by 5.2% has once again seen employers suggests dark days ahead. And yet for workers, inflation has been anything other than good.

Perhaps less than six months ago the thought that the Fair Work Commission would increase the minimum wage from $20.33 an hour to $21.38 – a 5.2% increase (technically 5.16%) – would have been unthinkable. It is the biggest increase since 1991 and more than double the 2.5% increase last year.

Related: Stagflation: what is it and is it really happening in Australia?

It of course riled employer groups. This is not a shock – employer groups always argue that the minimum wage should go up by no more (and usually much less) than inflation.

The Australian Chamber of Commerce and Industry suggested it “is too much amid current economic pressures and uncertainty” and that it “risks triggering greater inflation, raising costs for consumers, and making it harder for businesses to retain workers.”

The Australian industry Group’s chief executive, Innes Willox, argued it “will fuel inflation and lead to even higher interest rates; even more hardship for people with mortgages”. AiG, it should be noted, argued for a 2.5% increase.

It really is quite incredible that a 5.2% increase in the minimum wage is going to trigger greater inflation, when inflation to March already increased 5.1% and on Tuesday the governor of the Reserve Bank of Australia told ABC’s 7.30 that “by the end of the year” he expected “inflation to get to 7%”.

What a wonderful world we live in where a wage rise below inflation will apparently cause greater inflation!

In reality, the $1.05 hourly increase will see the minimum wage fall in real terms. And should 7% inflation growth occur by December, real minimum wages will be back to 2017 levels by this time next year:

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At least they won’t be back at 2015 levels, which is what would have occurred had the commission decided to go with the AiG proposal of a 2.5% increase.

That wages are growing less than inflation is a real worry, especially given that wages were once the great metric the RBA cared about when deciding whether to raise interest rates.

The June 2021 governor’s statement concluded that the RBA “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.”

Now, a year later, inflation is well above 3%. But what about wages?

A year ago wages were growing at 1.7%; now they are at 2.4%. That is a significant increase but nowhere near the level normally associated with inflation above 3%.

The latest data revealed that those who did receive a pay rise in the first three months of this year had an average 3.4% increase. That was the biggest such increase since June 2013. The problem is that back then inflation was growing at 2.4%, not the current 5.1%:

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This means inflation pressures are coming not from wages but from the supply blockages of products and also our weird consumption habits.

The pandemic has massively changed how we spend our money. We are actually spending overall less than would have been expected by this time before the pandemic, but that is only because we have shifted our spending so much away from services.

Our purchases of goods is about 3.5% above the five-year pre pandemic trend but our spending on services is more than 6% below that level.

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It means we are buying goods as though the world is about to end, and not buying services, as if we believe we could catch a virus if we do.

That demand pressure for goods helps stoke inflation, which is further increased because that price of inventories – which is the cost of things that are either sold or used to make into things that are sold – has risen markedly in the past year.

But at the same time the cost of labour has not. In the past nine months the cost of inventories has risen 11.7% while labour costs have gone up just 1.5%:

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The problem is that interest rate rises affect both prices and wages.

We have inflation running hot, due to our changed spending habits, the lack of spending we did during the pandemic lockdowns that is now being done and because the cost of making things (especially using products from overseas) has risen.

Raising interest rates will dampen our ability to spend (because we will be having to pay more of on our mortgages and in turn rents) but will do little to reduce the cost of making products that are dependent upon world prices.

Related: The recovery we had to have has put profits first and wages later – leaving workers out of pocket | Greg Jericho

The increased rates will put a dampener on wage growth – despite showing no signs of causing inflation. Workers and their wages are the collateral damage of the war on inflation.

By this time next year, if inflation rises as the RBA estimates, the minimum wage will be 3.7% lower in real terms than it was in September last year.

At that point inflation will hopefully be on the way down.

And at that point, as well, you can bet that employers will be arguing those on the minimum wage need to take yet another real wage cut.

• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work

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