Economist warns NZ's wage growth 'success' now into 'danger zone' of fueling inflation

A leading independent economist is warning New Zealand's wage growth "success" is reaching the "danger zone" and could fuel inflation.

It comes after Statistics News Zealand previously released its labour market statistics for the June quarter showing an increase in wage inflation.

Wage inflation - measured by the Labour Cost Index (LCI), which takes into account all salary and wage rates - has jumped to 3.4 percent, up from 3 percent on the March quarter. Average ordinary time hourly earnings rose 6.4 percent - that compares to annual inflation of 7.3 percent.

Annual inflation is currently sitting at 7.2 percent, down slightly from its June peak of 7.3 percent, but significantly higher than the Reserve Bank of New Zealand's 1 to 3 percent target.

Independent economist Cameron Bagrie told AM on Tuesday the increase in wages is a "success" but we are getting to a point of too much success.

"What we've got there at the moment is success. It's a great story that wages are moving up, of course, but we are now into that zone where it's too much success because it's actually adding to inflation," Bagrie told AM co-host Melissa Chan-Green.

Bagrie said we are now in the "danger zone" where labour and business costs could be affected.

"Life is all about balance and so is the economy. We want to see strong wages, but we want to see sustainable growth in wages," he said.

"Where we are at the moment, if you look at the income growth we're seeing with the [LCI], we are now in the danger zone where it's feeding into inflation pressure. Inflation moves up, labour costs [have] got to move up on the other side and that adds to business costs, which adds to inflation... The labour market needs to soften up to get a little bit of reality, things back and check, back into balance."

Westpac released its latest economic overview on Tuesday, which showed pressure on prices and wages meant the odds of a soft landing for the New Zealand economy were getting slimmer.

Westpac senior economist Satish Ranchhod said many borrowers had yet to feel the impact of higher interest rates.

"A lot of people are factoring in those high inflation numbers but rather than coming through directly in their spending they're trying to push for bigger increases in wages," he said.

"That's a normal thing for any household to do but when we see it happening right across the economy it can really give life to that inflation story meaning that inflation stays higher for longer."

The overview showed borrowers are set to bear the brunt, with the impacts of higher interest rates expected to become more noticeable in the coming months.

Bagrie told AM recent decisions by the Reserve Bank are yet to really hit New Zealand.

"So the tough time for New Zealand is going to be the back half of 2023, 2024 as those fixed mortgage rates roll off to far higher interest rates," he said.

"So we know there's there is a tightening of the belt that's around the corner. If we don't see that tightening of the belt, well, the Reserve Bank are not going to hit their remit, they're not going to be hitting the inflation target. So it's game on in regard to the Reserve Bank getting that inflationary thief back in jail."

Watch the full interview with Cameron Bagrie above.