Wage growth means that inflation is likely to be weaker

The causes of inflation are complex. They can be boiled don to demand-pull and cost-push forces, but in reality the forces that drive the inflation rate are complex and numerous variables feedback to influence others. The Monetary Policy Committee of the Bank of England monitor over 1500 different statistics to reach their judgement on the path of future inflation.

One variable that is important is wages growth. Wages feed through into inflation because they affect the cost of production. If wages are rising more slowly then it is fair to assume that the upward pressure on prices will be reduced. This would be classified as lower 'cost-push' pressure on inflation.

However lower wages growth is quite probably associated with low demand pressures. There isn't enough Aggregate Demand for firms to be competing for scarce labour resources. When there is high Aggregate Demand labour shortages cause wages to be bid up faster.

Australian wages growth is now the lowest it has been for twenty years. This suggests low inflationary pressure and the article below suggests that this means the Reserve Bank of Australia will cut interest rates again soon.

It would be a mistake to say this is low cost-push' inflationary pressure alone, because the problem begins on the demand side of the economy.

The Guardian article is here

This article is relevant to IB and VCE economics. VCE students need to know the demand and supply side influences on the Australian economy and how these are affecting the macroeconomic goals of the economy. IB students also need to understand the process of inflation and its various influences.