Over the RBA's inflation-targeting era, real Earnings and productivity have each grown by around 1% a year. With the Central Bank now trimming its productivity assumption, that link has fresh relevance for workers hoping to catch up on living costs.

Why can't wages simply rise faster to make up for years of high prices? It is a fair question for any household that has watched grocery bills, fuel costs and rents climb. One answer, offered by Reserve Bank Monetary Policy Board member Iain Ross AO, comes down to a single relationship: the link between what workers earn in real terms and how much they produce.

"Productivity growth is an enabler and a constraint on real wages growth," Ross said in his speech "A Wage-price Spiral: What are the Chances?", delivered on 22 September 2026.

Two numbers moving together

Ross noted that, over the inflation-targeting period, real earnings and productivity have each grown at around 1% a year. The two figures tracking each other is no coincidence. Over long periods, sustained increases in real wages tend to rely on workers producing more per hour, because that is what allows businesses to pay more without simply passing the cost on in higher prices.

That is why Ross described productivity as both an enabler and a constraint. Stronger productivity growth creates room for real wages to rise. Weak productivity growth limits that room. Wage rises that run well ahead of productivity for long periods, in this framework, are more likely to show up as Inflation than as lasting gains in purchasing power.

Ross added a further detail: the Wage Price index captures around half of trend productivity growth.

The RBA's productivity downgrade

This relationship takes on new importance because the RBA has become more pessimistic about productivity. Deputy Governor Andrew Hauser said at a Citi conference fireside chat in Sydney on 21 October 2026 that the RBA had cut its assumption for underlying productivity growth from 1% to 0.7%.

That downgrade is not a wage forecast. But read alongside Ross's framework, a lower productivity assumption implies less room for real wages to grow sustainably over time than a 1% assumption would allow.

It also has implications for monetary policy. If the economy's productive capacity is growing more slowly, the pace of growth it can sustain without generating inflation is lower too. The November 2026 Statement on Monetary Policy (SMP) judges that "The economy is currently operating with excess Demand and is judged to reach balance next year". Hauser put the strategy plainly: "We need a period of below-trend growth to bring inflation down, and we're seeing that happening."

Why this matters for the spiral question

Ross's speech set out to assess the risk of a wage-price spiral, in which higher prices lead to higher wages, which lead to still higher prices. His conclusion was: "there is little evidence that a self-sustaining Wage-Price Spiral has emerged following the latest inflationary episode."

Several structural features support that view, according to his speech:

  • Union membership has fallen from slightly over half of employees in the late 1970s to 13% now.
  • Quarterly wage indexation, introduced in early 1975, was abandoned in July 1981.
  • Enterprise agreements average three years, with about 10% of agreement-covered employees moving to a new agreement each quarter.

The contrast with the 1970s is stark. Ross noted that inflation rose from about 3% in 1969 to over 16% in 1974, while male average weekly earnings grew 25% in 1974.

Internationally, research by Alvarez and co-authors identified 79 wage-price spiral episodes in 31 advanced economies.

The current inflation squeeze

The productivity link matters because inflation has been eroding purchasing power. Monthly headline CPI inflation was 4.3% in year-ended terms in September 2026, up from 3.5% in July. The trimmed mean, the RBA's preferred underlying measure, was 3.7% over the year to the September quarter, and 1.0% in the quarter itself. These are distinct measures and both sit above the 2–3% target.

The SMP forecasts headline CPI inflation of 4.5% at December 2026 and trimmed mean inflation of 3.6%, before both ease to 2.7% and 2.9% respectively by December 2027. These are forecasts, conditional on assumptions such as energy prices declining from elevated levels.

On 3 November the Monetary Policy Board raised the cash rate target by 25 basis points to 4.85%. Six members voted to raise; three voted to hold at 4.60%. The Board's statement noted that "there is an increasing risk that higher inflation expectations will become embedded."

Assistant Governor (Economic) Sarah Hunter framed the RBA's motivation in an interview aired on 25 October: "We don't want to live with high inflation for a long time." In the same interview, she cited 1970s price controls and an early-1980s wage freeze as alternatives that had failed.

If productivity is the constraint, then productivity is also where the opportunity lies. Faster productivity growth would, on Ross's framework, expand the scope for sustainable real wage gains without adding to inflation pressure.

The RBA has noted some developments that bear on the economy's productive capacity. The Board's statement pointed to stronger Business Investment in the near term, including data centres, and the minutes of the September meeting recorded business investment up more than 10% over the year. Whether that investment ultimately lifts productivity growth remains to be seen; the RBA's current assumption is 0.7%.

The bottom line

Real earnings and productivity have each grown by around 1% a year over the inflation-targeting period, reflecting a long-run link between what workers produce and what they can sustainably earn. Ross described productivity as both "an enabler and a constraint" on real wages growth.

With the RBA's productivity assumption now cut to 0.7%, that constraint looks tighter, even as Ross found little evidence of a self-sustaining wage-price spiral. Readers thinking about how inflation and wage trends affect their own finances can consider speaking with a licensed adviser.