New Zealand labour market statistics for the three months to December showed a rebound in employment but a further increase in the unemployment rate from recent historic lows. Labour costs grew at a steady pace.

Employment rose 0.4 percent on the quarter in the three months to December after falling 0.1 percent in the three months to September, while year-on-year growth moderated from 2.7 percent to 2.4 percent. The unemployment rate increased from 3.9 percent to 4.0 percent, while the participation rate fell from 72.0 percent to 71.9 percent. The unemployment rate has been trending higher since reaching historic lows in 2022 when border closures caused labour shortages.

Headline private sector wages growth continued to moderate in year-over-year terms in the three months to December. The labour cost index rose 1.0 percent on the quarter, up from growth of 0.8 percent previously, while year-on-year growth in this index eased from 4.1 percent to 3.9 percent.

In New Zealand, employment is expected to rebound 0.3 percent on quarter in October-December after falling 0.2 percent in July-September while the year-over-year increase is seen slowing to 2.1 percent from 2.4 percent. The fourth-quarter unemployment rate is forecast at 4.3 percent, up from 3.9 percent in the third quarter.

The Labour Cost Index (LCI) measures movements in base salary and ordinary time wage rates and overtime wage rates. The non-wage component measures cost changes including annual leave and statutory holidays; superannuation; ACC employer premiums; medical insurance; motor vehicles available for private use low interest loans. The LCI is a measure of the extent to which changes in businesses' input costs put pressure on the output prices they charge for goods and services.

As a measure of labour cost, the LCI helps the Reserve Bank of New Zealand measure inflation. The RBNZ, with an inflation target range of 1 percent to 3 percent uses this index in addition to other price indices to measure possible pressures in consumer prices.

RBNZ officials are always on the lookout for the prospects of inflationary pressures. Wage pressures tend to percolate when economic activity is booming and the demand for labor is rising rapidly. During economic downturns, wage pressures tend to be subdued because labor demand is down. By tracking labor costs, investors can gain a sense of whether businesses will feel the need to raise prices. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall.