Australian Workers Face Declining Real Wages as Inflation Outpaces Earnings
Greg Jericho, a Guardian columnist and chief economist at the Australia Institute, highlights a concerning trend: in 2025, wages in Australia rose by just 3.4%, falling short of the annual inflation rate of 3.8%. This disparity means that for the first time in over two years, real wage growth has turned negative, effectively reducing the purchasing power of Australian workers. The situation is exacerbated by the Reserve Bank of Australia's (RBA) persistent focus on wage growth as a primary driver of inflation, despite evidence pointing elsewhere.
RBA's Interest Rate Hikes Punish Workers Unfairly
The RBA recently increased interest rates, citing that wage growth had slowed only gradually and unit labour costs remained high, indicating a tight labour market. The central bank's rationale is that by raising rates, consumer spending will decrease, leading employers to cut staff and hours, thereby reducing wage pressures. However, this approach overlooks a critical fact: if wages are growing slower than inflation, they cannot be the cause of rising prices. Jericho notes that the RBA never misses an opportunity to blame wages, as it provides the only justification for interest rate hikes, yet this logic is fundamentally flawed.
Profit-Push Inflation Returns as the Real Culprit
Analysis by David Richardson at the Australia Institute, using the RBA's own forecasts, reveals that wage growth is not fuelling higher inflation. Instead, the data shows that "profit-push" inflation has made a comeback. By examining wage growth, inflation forecasts, productivity, and the wage share of the economy, Richardson identifies two main groups driving inflation: wages and non-wages, with the latter primarily consisting of company profits and small business income. This analysis indicates that profits were the main cause of inflation in 2021 and 2022, and they are once again the dominant factor.
The RBA's February statement acknowledged that strong demand allowed retailers to increase prices beyond what changes in imported goods would justify, a polite way of saying companies raised prices to boost profits. Ironically, this profit-driven price rise directly contributes to inflation, yet it was not mentioned in the RBA board meeting minutes that decided to raise rates. Recent corporate announcements underscore this trend: JB HiFi reported a 7.1% increase in net profit for the half-year, and the Commonwealth Bank announced a half-yearly profit of $5.45 billion, up 7%.
Stagnant Real Wages and a Rigged Economic Feeling
The consequences for workers are severe. The value of average real wages is now the same as it was 15 years ago and over 4% lower than in March 2021. The RBA forecasts that real wages will remain essentially flat for the next two years, a grim outlook compounded by the bank's active efforts to suppress wage growth. This dynamic leaves many Australian workers feeling that the economy is rigged against them, as they bear the brunt of inflation without corresponding wage increases, while profits soar.
In summary, the narrative that wages drive inflation is being challenged by clear data showing profit-driven price rises. As real wages decline and the RBA continues its punitive interest rate policies, the economic strain on Australian households intensifies, highlighting a systemic issue that requires a shift in policy focus away from blaming workers and towards addressing corporate profit margins.
