A minimum wage increase delivers a maximum inflation risk

The Reserve Bank’s job to bring inflation under control was just made more difficult by the Fair Work Commission.

No matter how you couch it and the reasons for it, the 4.75 per cent increase in the minimum wage is a risk that the economy – and the Reserve Bank – just did not need.

If you think 4.75 per cent is sizeable, that’s because it is. It’s the third-largest increase since the Global Financial Crisis (during which the commission’s predecessor, the Fair Pay Commission, froze wages for the lowest paid).

In dollars and cents, it takes the full-time weekly minimum wage beyond the $1000 mark to more than $52,000 a year. An important caveat is that about 70 per cent of those on the minimum wage are part-time or casual workers.

While about a fifth of the workforce is affected, their pay is so low that it accounts for just 11 per cent of the national wage bill.

But the increase is so large that it will deliver a measurable increase in the Reserve Bank’s key measures of wage growth and labour costs.

Just three weeks ago, the RBA forecast that wages growth would remain around 3.2 per cent over the next 18 months.

The minimum wage increase will definitely push that up. The question is by how much. And that’s the problem.

AMP economist My Bui, for instance, reckons wage growth could hit 3.7 per cent by December, adding to already high inflation as businesses pass on higher labour and input costs.

She believes the RBA will now push official interest rates to 4.85 per cent by November. That’s two more rate hikes on top of the three that are just starting to work their way through the economy.

Cumulatively, that would amount to 1.25 percentage points of interest rate pain in less than 12 months. On a $600,000 mortgage, that’s an extra $500 a month or $6000 a year.

Outside the end of the pandemic, when the Reserve Bank jacked up the cash rate from 0.1 per cent to 3.1 per cent between May and December 2022, you have to go back to the early 1990s (when the average mortgage was just $81,500) to find a similarly intense tightening of monetary policy in such a short period of time.

Most other economists are not nearly as pessimistic about the fallout from the Fair Work Commission decision. While slightly higher than had been anticipated, many think it will only marginally add to the economy’s inflation risks.

That is the issue. Even though inflation was a little lower than expected in April, it was still running at 4.2 per cent while underlying inflation edged up to 3.4 per cent.

Almost every risk to inflation remains to the upside, led by Donald Trump’s