Rates, inflation to take edge off growth

Scott Morrison campaigning in Melbourne.
The latest wage figures are likely to turn up the heat on the government's economic performance. -AAP Image

Ballooning inflation and an expected rapid rise in interest rates is likely to take the edge off economic activity this year, particularly as Australians' wages fail to keep up with cost of living pressures.

The Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity three to nine months into the future, fell to 88 per cent in April from 1.69 per cent.

However, at an index above zero, it still indicates the economy will grow above its long term trend rate of around 2.8 per cent.

Westpac chief economist Bill Evans said his bank had recently revised down its growth forecast for 2022 from 5.5 per cent to 4.5 per cent.

"That reflected the sharp increase in the cost of living as headline inflation lifted by 5.1 per cent in the year to March ... and an earlier and more rapid policy tightening from the RBA," Mr Evans said.

"That said, near term prospects are still positive."

However, despite the apparent strength of the economy, the Australian Bureau of Statistics' wage price index for the March quarter due on Wednesday is likely to show people's pay is growing at half the rate of inflation.

Economists expect the data - used by the Reserve Bank of Australia and Treasury to assess wages growth - is likely to show wages grew at a slightly more upbeat 0.8 per cent in the March quarter.

However, this would still leave the annual rate at 2.5 per cent, albeit the fastest pace since 2014.

Cost of living pressures have dominated the six-week federal election campaign.

"If (wage growth) comes out as the economists expect, what it will show is that we're about to see the biggest real wages cut in more than 20 years," shadow treasurer Jim Chalmers told the Nine network.

"The government doesn't want you focused on that."

But Prime Minister Scott Morrison, like the RBA, insists wages are going up.

"Inflation is the challenge," he told reporters while on the campaign trail in Melbourne.

"Wages are going to go up because unemployment is coming down. And unemployment has fallen to four per cent in this country."

April labour force figures are released on Thursday and economists expect them to show unemployment has fallen even further to 3.9 per cent, its lowest level since 1974.

Even if economists are wrong and the wage result proves to be stronger because of a tight labour market, there will be little joy for borrowers.

The RBA is widely expected to lift the cash rate by 25 basis points to 0.6 per cent at its June board meeting, following on from its first rate increase in more than a decade earlier this month.

The minutes of the RBA May board meeting released on Tuesday showed it discussed the option of increases of 15, 25 or 40 basis points in the cash rate.

It said a 25 basis points rise would help signal the board was now returning to normal operating procedures after the extraordinary period of the pandemic.

But it said an argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates.

Commonwealth Bank senior economist Belinda Allen said a stronger than expected wages result - or a lower than expected unemployment rate - could sway the RBA to lift by 40 basis points rather than 25 basis points in June.