Inflation has multiple components. Goods inflation is still high but the global slowdown is causing it to ease.
But a key influence for inflation, particularly in services, is unit labour costs. Unit labour costs in an economy refer to the cost of the labour it takes to produce one unit of output. So for example, if you produce 10 per cent more in an hour and are paid 10 per cent more per hour, your unit labour cost remains the same because each dollar of labour is getting the same amount of output. But if you get a 10 per cent payrise and do 3 per cent more, your unit labour cost is higher, because even though you’re producing more per hour, each dollar of labour cost isn’t producing as much output.
“Doing more” in an hour is not simply people working harder. Productivity growth can come from having better technology available, more education or more efficient processes at work. Your pay is the wage growth part of unit labour costs.
So when wage growth is going up quickly and productivity isn't going up as quickly, that's when we get an inflation problem - because it mean the cost of producing one unit of output is higher. This is what is currently happening in Australia. Unit labor costs in the year to March 2023 went up 7.9 per cent.
But again, that’s just not wages – it’s also the business investment, technology, process side of unit labour costs.
Productivity affecting inflation.
There are a few different ways we can see inflation coming down. One is productivity growth which eases unit labour costs by allowing each dollar of labour to be more productive, create more output.