In his final public speech as RBA Governor, Philip Lowe stated that for inflation to average around 2.5%, wage increases should typically align with productivity growth plus an additional 2.5%. He sees it as a “reasonable benchmark”, even it’s “not a hard and fast rule”.
Lowe’s recent attention has been particularly focused on the risk associated with the current period of high inflation. Specifically, he warned of the peril that “wages growth and profits running ahead of the rate that is consistent with a sustainable return of inflation to target.”
In such a scenario, he cautioned, inflation would become “sticky,” necessitating “tighter monetary policy and more economic pain later on.”
Lowe acknowledged that recent data offers some level of comfort but emphasized the importance of remaining alert to these inflation risks. Rise in productivity growth, he noted, would be a welcome development as it would facilitate stronger growth in both nominal and real wages and profits.
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