Key Highlights

  • Bullock’s line on productivity came after the September rate rise and goes to why inflation has proved stubborn.
  • Weak productivity is a big reason unit labour costs are growing faster than the inflation target allows.
  • The RBA does not regard wages as the driver of inflation.

Of everything Michele Bullock said after the September rate rise, one short line about productivity may say the most about why inflation has proved so stubborn and why the RBA does not blame workers' pay for it.

Central bank governors are not known for colourful language, which is why one remark at the Reserve Bank of Australia's 29 September 2026 media conference stood out. Discussing the forces keeping inflation high, Governor Michele Bullock said: "The bottom line is that Productivity Growth Remains Subdued."

The comment came on the day the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60%, effective 30 September, its fourth increase of 2026. To understand why productivity matters to that decision, it helps to start with what the word actually means for prices.

Output per hour, and why it shows up in prices

Labour productivity is, broadly, how much the economy produces for each hour worked. When productivity rises, businesses can pay higher wages without necessarily raising prices, because each hour of work is generating more output. When productivity stalls or falls, even moderate wage growth raises the cost of producing each unit of output.

That cost is captured by unit labour costs, and it is where the RBA's concern lies. The minutes of the 28–29 September meeting state that unit labour cost growth is above the level consistent with the inflation target, and that this is driven mainly by weak productivity rather than strong wages. In other words, the problem is less that workers are being paid too much and more that output per hour is not growing.

Businesses facing rising unit labour costs have limited choices: absorb the cost through lower margins, find efficiencies, or pass it on through higher prices. When enough firms take the last option, the result shows up in inflation.

The numbers behind the remark

The RBA's August 2026 Statement on Monetary Policy (SMP), with forecasts finalised on 5 August and therefore before the September rate rise, shows why Bullock chose such blunt language. Year-ended labour productivity growth was forecast at:

  • minus 0.5% in the June quarter of 2026
  • minus 0.5% by December 2026
  • 0.4% by June 2027
  • 0.6% by December 2027
  • 0.7% in both June and December 2028

Over the same horizon, the Wage Price Index was forecast to grow 3.3% through June 2027, then 3.1% by December 2027, 3.0% by June 2028 and 2.9% by December 2028. Average earnings per hour (non-farm) were forecast to grow 2.7% in the June quarter of 2026, rising to 3.7% by June 2027 before easing.

Set side by side, those forecasts show wage growth in the low 3s while productivity was expected to shrink through 2026 and recover only modestly afterwards. Even the improved productivity figures forecast for 2028 sit well below the pace of wage growth.

Not a wages story

Bullock was careful to separate the productivity problem from any suggestion that pay rises are driving inflation. In her words, "there is no wage price spiral going on in Australia." She also pointed out that many workers are falling behind: "They're seeing real wage cuts."

That distinction matters. A wage-price spiral, where higher wages push prices up and higher prices prompt further wage claims, would be a very different problem from the one the RBA is describing. The Bank's account is that wages are growing at a fairly moderate pace, but because output per hour is not rising, those wages still translate into cost pressures that feed into prices.

The Governor's broader diagnosis was: "Inflation is too high and has been driven by domestic capacity pressures." Weak productivity is one reason capacity is tight. If the economy cannot produce more per hour, demand runs into supply limits sooner, and those limits show up as price pressure.

The labour market is part of that capacity picture. Unemployment rose to 4.6% in August, up from 3.5% over the past couple of years, but Bullock said "the unemployment rate is still quite low historically, and we still think the labour market is a little bit tight." Combined with weak productivity, that tightness is part of the capacity story the Governor described.

Investment, capacity and the long game

There are signs of strong business activity even as productivity languishes. According to the minutes, June quarter GDP was a little stronger than expected, led by private business investment, which was up more than 10% over the year. The Board's statement noted that "growth in business investment and debt is strong".

The August SMP forecast business investment growth of 6.5% in the June quarter of 2026, slowing to 4.3% by December 2026 and progressively lower after that. Nothing in the Board's September communications ties that investment to a near-term Assumed Productivity Recovery, so it would be a leap to assume one automatically follows from the other.

What the RBA has said is that inflation remains too high. Underlying inflation, measured by the trimmed mean, was 3.6% over the year to the June quarter of 2026; Bullock said it had been "about 3.5 per cent for the past six months", "a percentage point above our target". Headline CPI was 4.0% over the year to August 2026, according to the monthly CPI. The RBA targets 2–3%, aiming for the 2.5% midpoint.

The bottom line

Bullock's line that "Productivity Growth Remains Subdued" captures a central point in the RBA's thinking: inflation pressure is coming from domestic capacity constraints, and weak productivity is a big reason unit labour costs are growing faster than the inflation target allows, even though wages themselves are not the driver.

The August forecasts expected productivity to keep falling through 2026 before a modest recovery, and those forecasts predate the September rate rise. Until output per hour picks up, the RBA's tools are focused on the demand side of the equation. The September CPI is scheduled for release on 28 October and the next cash rate decision is scheduled for 3 November; the Governor has said she will not give forward guidance on the outcome.

The 0.7% medium-term productivity trend used in the RBA’s forecasting assumptions should not be interpreted as an improvement already achieved.