The headlines have been frightening.
They warn that consumers may have to pay $7 for a coffee and $3 for a litre of unleaded petrol by year's end.
While these predictions are largely due to factors such as high shipping costs and international movements in the price of oil, political debate in recent weeks has shifted to what impact a lift in the pay packets of workers could have on the costs of everyday goods and services.
Business groups and some of our political leaders have been suggesting that if the minimum wage rises by about 5 per cent, to keep in line with the soaring cost of living, that will in turn result in far higher prices for everyday goods and services.
Labor leader Anthony Albanese backed a pay rise of 5.1 per cent to keep up with inflation, saying without it, it will result in an effective pay cut for those on the minimum wage.
"What we are talking about here is the lowest-paid workers in Australia … workers who are paid $20.33 an hour, to be paid $1 extra. That is what this debate is about," Mr Albanese said.
But Prime Minister Scott Morrison has argued that would hurt the economy, as an increase of that magnitude could send the economy into an inflationary spiral.
On Tuesday, speaking about the party's plan to allow first home buyers to draw superannuation to buy homes, Mr Morrison told reporters "wage rises are good things and we want to see the wage rises occur", but added that should be "on a sustainable basis" and the best way for that to happen was to get unemployment down and ensure the economy grows.
A new report by The Australia Institute being released today aims to put an actual figure on how much those goods and services could rise under a 5 per cent lift in wages.
It suggests that boosting workers' wages by 5 per cent — for all workers, not just those on the minimum wage ——would lead to an increase in prices across the economy of about 2 per cent.
This would mean a 5 per cent wage increase could mean a $4 cup of coffee should only increase by about 9 cents.
"There is just no way that a 5 per cent increase in all wages, let alone a 5 per cent increase in the minimum wage alone, can lead to price increases of anything like 5 per cent," says one of the report's authors, The Australia Institute's chief economist Richard Denniss.
He argues that businesses are exaggerating the impact of wage rises on their costs as an excuse to boost profits.
Wage rises won't result in higher interest rates: report
The report suggests that wages account for about 25 per cent of business costs in Australia, which means that for an average firm, a 5 per cent increase in their total wages bill would only push up costs by 1.3 per cent.
Even in relatively labour-intensive industries like retail, wages only account for 38.8 per cent of total costs, meaning a 5 per cent increase in all retail wages would see costs rise by only 1.9 per cent.
And since wages account for only 35 per cent of the food and beverage service industry, a $4 coffee would only need to rise by 9 cents to cover increased wages.
He said the analysis likely overstates the impact of a wage rise on costs for a number of reasons including that "we ignore the benefits to employers of labour productivity growth, which lowers labour costs by over 1 per cent per year, and we assume that all of the increased prices in the supply chain happen instantly rather than being spread out over the next few years."
But the report shows the inflationary impact is higher for the most labour-intensive industries like education, healthcare and residential care.
ACTU Secretary Sally McManus says they will fight for a 5.5 per cent wage increase at the Annual Wage Review hearing at the Fair Work Commission today.
She says this increase is essential for boosting the wages of 1 in 4 workers who rely on the review for wage growth, and would lift the Adult Minimum Wage from $20.33 to $21.45 per hour, $772.60 to $815.09 per week and $40,175.20 to $42,384.84 a year.
"Minimum wage workers spend every dollar they earn, and avoiding ongoing real pay cuts is essential for ensuring workers keep money flowing into small businesses," she said.
Forecasts for wages growth
On Wednesday the ABS released its latest wage price index data, and in June the Fair Work Commission will release its minimum wage decision.
Most economists had correctly predicted a lift in the quarterly and annual figure, and did not expect it would be so high that it would force the Reserve Bank to hike rates more aggressively than expected.
ANZ senior economist Catherine Birch says there are huge economic benefits in ensuring that those on low wages do not see their wages fall by as much as they would without a solid increase in the minimum wage.
"If there was the 5.1 per cent increase in the minimum wage that Mr Albanese has been talking about, there would be some inflationary effects, but the increase in inflation would be smaller than increase in nominal wages [that is the increase without adjusting for inflation]," she says.
ANZ forecast that by the end of the year, wages will have hit 3.5 per cent and by next year, 4 per cent, which will have some inflationary impact. They are factoring in the Reserve Bank will hike rates to 2.25 per cent by May next year.
Barrenjoey Capital Partners chief economist Jo Masters says they are sticking to their expectations that the Reserve Bank will hike rates by 25 basis points in June, which would lift the cash rate from 0.35 to 0.60 per cent.
Ms Masters argues the issue is if real wages rise but productivity does not.
"Wages flow through to inflation in two ways," she says.
"The first one is directly. We know that for market services items — things like hairdressing, vets, dry-cleaning and haircuts — those wages form a large portion of the costs. And so, when you get wages growth, if it's not offset from productivity gains then those businesses need to increase prices.
"At the moment, supply is disrupted by global events including a supply chain distortion. But weak productivity growth means you're not boosting the supply side of the economy. Basically, for a business, if productivity is running as fast as wage growth, it's not as inflationary."
"Productivity is notoriously difficult to measure but for the past 5 to 10 years, Australia has had very weak productivity growth."
Ms Masters says during the pandemic, Australian businesses were not able to pass on price increases.
"An ABS survey released last week found that 50 per cent of firms that [saw an] increase in output costs had passed on some or all of that," she says.
But she said Wednesday's wages data is not likely to show the full impact of pay rises across the economy but that the September quarter data, which will account for the minimum wage increase, will.
