Employment falls for second consecutive month

The unemployment rate rose 0.2 of a percentage point to 3.7 per cent in January as the economy shed 11,500 jobs, with the loss of 43,000 full-time jobs eclipsing a gain of 32,000 part-time positions.

The result is likely to encourage the Reserve Bank of Australia that monetary policy is gaining traction and working to cool demand in the economy.

Treasurer Jim Chalmers said the unemployment increase was "completely consistent" with the government's budget forecasts and warned it was likely to rise higher in the coming months.

"The interest rate rises which are in the system are about taking some of the heat out of the economy and that has consequences for the unemployment rate. I suspect we're seeing the beginning of that, in the number that is released today," the treasurer said.

Dr Chalmers said the nation was entering "what we expect will be a really difficult year for the economy and for our people. When the economy slows, when the unemployment rate ticks up ... there are human consequences for that".

The Australian Bureau of Statistics (ABS) figures show that in January there were an extra 21,900 people who wanted a job but could not find one and total hours worked in the month fell by more than 2 per cent - the third consecutive month of decline.

Workforce participation declined slightly to 66.5 per cent, driven by a drop-off among women.

Head of labour statistics at the ABS, Bjorn Jarvis, said the number of hours worked dropped in January as more than two in five workers took advantage of a summer free of COVID-related restrictions to go on holiday.

In his testimony to a Senate committee on Wednesday, RBA governor Philip Lowe said the risk of a wage-price spiral was low, but warned that the consequences if one developed could be damaging.

But the pick-up in unemployment, combined with more timely indicators showing falls in job ads and vacancies, may reduce concerns that wages - which grew at 3.1 per cent in the September quarter - will accelerate to an unsustainable pace.

HSBC Australia chief economist Paul Bloxham said the employment figures were much weaker than had been expected and suggested that the labour market was starting to loosen.

Mr Bloxham said that a rising unemployment rate would typically be considered a bad development, "but at the moment, policymakers are likely to see it as good news".

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"In an economy where demand has been running ahead of supply, inflation is well above target and...clearly feeding through to a pick-up in wages growth, a loosening of the labour market is what is needed. The economy has been too hot, and this is a clear sign that it is starting to cool," he said.

The Reserve Bank is also closely watching consumer spending, which has become a significant driver of inflation.

While consumer sentiment has plunged to levels not seen since major downturns and crises including the 1990s recession and the early stages of the pandemic, the CommBank Household Spending Intentions index increased marginally in seasonally adjusted terms last month.

However, CommBank economist Stephen Halmarick said that although consumption grew, the pace of increase was slowing.

Mr Halmarick said the result "adds to evidence that rate hikes are beginning to have a impact on consumer spending".

He said the reading, combined with the increase unemployment, suggested monetary policy was working to slow growth.

Mr Halmarick has forecast two more rate hikes to take the cash rate 3.85 per cent, which he expected would be its peak.