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Governor Michele Bullock used the 29 September media conference to rule out a wage-price spiral, pointing instead to energy, technology and expectations as the forces keeping inflation too high.

When the Reserve Bank of Australia (RBA) lifted the cash rate for the fourth time this year, one of the most pointed lines from the Governor was not about interest rates at all. It was about pay.

"There is no wage price spiral going on in Australia. Rises in wages are not driving these cost pressures," Governor Michele Bullock told reporters after the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent on 29 September.

The comment matters because wage growth is often the first suspect when inflation stays stubborn. If workers secure larger pay rises to keep up with prices, and businesses then lift prices again to cover higher labour costs, the cycle can become self-reinforcing. That is the dynamic usually described as a wage-price spiral. The Governor's message was that this is not what the RBA is seeing in Australia right now.

So if wages are not the culprit, what is? The RBA's own statements give a fairly clear answer.

Where the RBA says the pressure is coming from

The Board's statement on 29 September pointed first to energy. "The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts," the Board said. It added: "Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation."

Those higher fuel costs are not staying at the bowser. According to the statement, "Higher fuel prices have partially been passed through to prices of other goods and services."

The second pressure point is technology. The Board noted that "AI-related demand is driving rapid growth in global prices for technology-related goods." At the media conference, Ms Bullock expanded on the theme, saying: "The global AI investment boom has driven significant price rises for some inputs within the AI supply chain."

A third factor surfaced in the Governor's opening statement to the House of Representatives Standing Committee on Economics on 18 September: "The Middle East conflict, the AI boom and extreme weather events are contributing to upward pressure on a range of energy, agricultural and technology-related prices."

None of these items is driven by Australian pay packets, which is the distinction the Governor was drawing.

A tight labour market, but not a wage spiral

Ruling out a wage-price spiral is not the same as saying the labour market has no bearing on inflation. Ms Bullock was clear on that point too.

"The unemployment rate is still quite low historically, and we still think the labour market is a little bit tight," she said on 29 September. She noted that unemployment "has risen from 3.5 per cent over the past couple of years to 4.6 per cent", and that more than a million jobs have been created over that period.

In other words, the RBA still sees some heat in the jobs market, even as the unemployment rate has drifted higher. The Governor's point was narrower: rising wages are not the engine behind the current round of cost pressures. A labour market that is a little tight is one thing; a spiral, in which wages and prices chase each other upwards, is another.

The distinction also helps explain why the RBA has emphasised demand. In her 18 September statement, Ms Bullock said: "A period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably."

Why expectations are the real worry

If wages are not the problem today, the RBA's concern is that they, and prices more broadly, could become a problem tomorrow. That is where inflation expectations come in.

"It's critical that we stop expectations for high inflation from becoming embedded in price-setting decisions," the Governor said at the media conference. The Board's statement flagged the same risk: "Short-term measures of inflation expectations remain elevated."

The logic is straightforward. If households and businesses come to believe high inflation is here to stay, they may build that belief into their decisions about prices and pay. That is how a temporary shock, such as an oil price surge, can turn into something more persistent. Preventing that shift is a central reason the RBA gave for acting now rather than waiting.

Ms Bullock struck a similar note on 18 September: "Inflation is too high. We are focused on getting it back down and making sure that it does not become embedded."

The numbers explain the urgency. Headline inflation from the August monthly CPI indicator was 4.0 per cent, according to the RBA's homepage. Underlying (trimmed mean) inflation has been lower: Ms Bullock said it has been about 3.5 per cent for the past six months. Both sit above the 2–3 per cent target range, and the RBA aims for the 2.5 per cent midpoint.

How the RBA hopes to push back

With wages ruled out as the main driver, the transmission channels the RBA relies on take on extra significance. Ms Bullock described the exchange rate channel as the most important, because it affects import prices. Given that several of the pressures she listed, from fuel to technology inputs, are global in origin, the cost of imports is directly relevant.

She also cautioned that rate changes take time to work, saying "it can take 12, perhaps even 18 months" for the full effect to come through.

The Governor acknowledged the burden on borrowers. "I know this decision is difficult for households with a mortgage and businesses with loans," she said. She added that a recession "is not our central base case at this moment."

As for what comes next, the RBA has not committed to a path. The Board said it "will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed." Ms Bullock said: "The Board will increase interest rates again if that's what's needed to get inflation down."

The bottom line

Governor Bullock's insistence that wages are not driving inflation reframes the debate. The RBA's account centres on energy prices linked to the Middle East conflict, fuel costs spilling into other prices, AI-related demand for technology goods and extreme weather, alongside a labour market it still regards as a little tight. Its biggest worry is that elevated short-term expectations could become embedded in how prices are set. What to watch: the next CPI release on 28 October, the September meeting minutes on 13 October, and the Board's next decision and updated forecasts on 3 November.