Wages are failing to keep pace with inflation in another blow to Australians struggling to keep up with mounting price pressures after the Reserve Bank of Australia forecasted real wages will lag for 18 months.
The Australian Bureau of Statistics on Wednesday revealed the wage price index rose 0.1 per cent to 3.4 per cent in the December quarter.
This remains below the rate of inflation which grew 3.8 per cent in the 12 months to December.
It comes as the RBA warned that real wages growth will not recover until mid-2027 while inflation is expected to peak at about 4.2 per cent this year.
EQ Economics managing director Warren Hogan said the ABS figures showed real wages were “unfortunately going backwards” and tore into large public spending.
“It just reinforces that we’re not on a great pathway, that even though we’re starting to see this private sector recovery, it’s very inflationary because the government is just too big a part of our economy,” Mr Hogan told Sky News.
“It’s had a huge increase in its presence in terms of spending and taxation and it’s continuing to grow too fast.
“We now have an economy that has capacity constraints which means there’s competition between the public sector and the private sector.”
Wages lifted 0.8 per cent in the quarter and annual public sector wages rose four per cent while private sector wages jumped 3.4 per cent.
ABS head of prices statistics Michelle Marquardt said a bump in state government contributions boosted public wages.
“Strong growth in public sector wages for 2025 was due to new state public sector agreements that delivered multiple pay rises over the course of the year,” said Ms Marquardt.
“Multiple pay rises occurred when agreements included backdated increases that took effect soon after the agreement was finalised, and a further scheduled rise was received later in the year.”
Mr Hogan said Australia’s lacklustre productivity growth, which sits at an annual rate of 0.8 per cent, meant labour costs were exacerbating inflation’s rise.
“With negative productivity growth, cost pressures in terms of labour costs are rising by about 5 per cent and this tells us that the inflation is not going to go away,” he said.
“It’s also bad news for consumers and for business because the weakness in the private sector wage number highlights that businesses are under pressure.
“They’re barely able to pay an inflation rate in wages (and) they can’t give real wage increases to their workers, despite the fact the only productivity we’re seeing in our economy is in the private sector.
“Whereas the public sector is getting bigger pay rises, but they have no productivity.”
Other economists also warned that wages pressure will be slow to recede over the coming year and furthers the case for the RBA to deliver more rate hikes.
Capital Economics’ senior APAC economist Abhijit Surya said the central bank would raise the rate half a per cent by the third quarter of this year.
Harry Murphy Cruise from Oxford Economics Australia said if wages continued to rise while productivity remained low, the RBA would be forced to keep rates higher for longer.
“If capacity constraints persist and employers are simply paying more for the same level of output, stronger wages will translate into higher unit labour costs, prolonging inflation pressures and keeping interest rates higher for longer,” Mr Murphy Cruise said.
Treasurer Jim Chalmers boasted that Wednesday’s figure marked the 14th consecutive quarter that annual wages have lifted above three per cent.
“There was not one quarter in the 35 quarters of the former government when nominal wages grew above three per cent,” Mr Chalmers said in a statement.
His boast comes despite inflation hovering around 2-3 per cent under the three previous Coalition governments, except for in late 2021 and early 2022 when post-pandemic inflation took off.