Australians can expect weak increases in their wages even as the unemployment rate drops and business investment starts to gather pace, according to the latest assessment of the economy from the Reserve Bank.
The RBA has lowered its expectations for improvements in the stagnant inflation rate, saying in its latest Statement on Monetary Policy that even though the economy is expected to expand over the next two years, low wages and tough retail conditions will keep inflation near the lowest limits of its preferred two-to-three per cent target band.
"A number of factors are serving to hold inflation down," the RBA said in its November quarterly statement on Friday.
"Wage growth has remained low and strong competition in the retail sector is dampening retail inflation across a broad range of goods."
All-important household spending is still weak, the RBA said, driven mainly by "unusually soft" average earnings growth that was counteracting the improvement in the unemployment rate.
Employment and wages had fallen in the wake of the mining boom but now there are signs of recovery in non-mining investment, the RBA has warned wage growth may not match the improvement in job numbers.
"Shifts in the composition of employment within industries to lower-paid work might partly explain this," the RBA said of the weak average wages growth.
While the bank expects a gradual improvement in wages in coming years as the labour market gets tighter and businesses pay more to attract staff, that is likely to be the experience of a limited number of industries.
More generally, the RBA said, "there is little evidence that this is translating into higher wage growth more generally".
The bank also noted that wage growth in new enterprise agreements being signed has actually declined.
The central bank said the outlook for household income growth remains a significant uncertainty in its efforts to forecast consumption growth.
HSBC's Australia-New Zealand chief economist Paul Bloxham said the RBA was too pessimistic in its wages outlook.
"Our view is that the current momentum in the labour market is likely to continue (we are more optimistic than the RBA on this) and that this should start to put some upward pressure on wages growth in coming quarters," Mr Bloxham said in a research note.
By contrast RBC Capital Markets head of Australian fixed interest strategy Su-Lin Ong said the November statement suggested a "dovish" stance on rates from the RBA.
"Taken at face value, today's forecasts suggest scope to ease should activity, the labour market, and wages growth disappoint," Ms Ong said.
"Persistently sub-target inflation would be harder to ignore in such circumstances."
The Australian dollar fell immediately after the 1130 AEDT release of the November statement but has recovered to be trading at 76.82 US cents at 1632 AEDT, above its 76.79 US cents close on Thursday.
