Key Highlights

  • Bullock acknowledged that prices have been rising faster than pay, describing the result as real wage cuts.
  • The RBA does not regard wages as the engine of inflation, focusing instead on domestic capacity pressures and weak productivity.
  • The August forecasts show wage growth moving back above headline inflation from mid-2027, though those projections will be revisited.

Reserve Bank Governor Michele Bullock acknowledged at her 29 September media conference that pay has been losing ground to prices, even as she rejected the idea that wages are driving inflation.

Among the many lines Governor Michele Bullock delivered after the Reserve Bank of Australia (RBA) lifted the cash rate target to 4.60% on 29 September 2026, one of the shortest said a great deal about household finances. At one point she said simply: "They're seeing real wage cuts."

A real wage cut happens when pay rises fail to keep pace with the cost of living, so a pay packet buys less than it did before even if the dollar figure on the payslip has grown. Bullock's remark sat alongside another statement that cuts against a common assumption about inflation: "there is no wage price spiral going on in Australia."

Together, the two comments frame how the RBA sees the link between wages and prices in 2026 — and why, on its account, the fourth rate rise of the year was not a response to runaway pay.

Prices running ahead of pay

The RBA's own figures help illustrate the gap Bullock was pointing to. Headline consumer price inflation was 4.0% over the year to August 2026, according to the monthly CPI. Underlying inflation, measured by the trimmed mean, was 3.6% over the year to the June quarter of 2026. Bullock described underlying inflation as running at "about 3.5 per cent for the past six months", which she said was "a percentage point above our target".

On the pay side, the RBA's August 2026 Statement on Monetary Policy (SMP) put year-ended growth in the Wage Price Index (WPI) at 3.3% for the June quarter of 2026. Average earnings per hour in the non-farm sector were shown growing by 2.7% over the same period.

Set those figures beside the June-quarter headline CPI rate of 3.9% shown in the same SMP table and the shortfall is visible: on both pay measures, growth was below headline price growth. That is the arithmetic behind a real wage cut.

Bullock described the lived experience in broader terms: "Every household has seen how the price of everything has gone up in recent years."

Why the RBA rejects the spiral story

A wage-price spiral describes a self-reinforcing loop in which higher prices prompt bigger wage claims, which in turn push businesses to raise prices again. Bullock was explicit that she does not see that loop operating in Australia.

That matters because it shapes the diagnosis of where inflation is coming from. "Inflation is too high and has been driven by domestic capacity pressures," the Governor said. The minutes of the 28–29 September Monetary Policy Board meeting record that RBA staff judged the recent surprise in underlying inflation more likely reflected domestic capacity pressures than the pass-through of cost increases linked to the Middle East.

The minutes also contain a detail that ties directly to pay. Unit labour cost growth — a measure of labour costs relative to the output produced — was above the level consistent with the inflation target. But the minutes attribute this mainly to weak productivity rather than strong wages. Put simply, the problem identified is less that workers are being paid too much and more that output per hour has not been growing.

Bullock's summary of that productivity picture was blunt: "The bottom line is that productivity is doing nothing."

Does the squeeze ease in the forecasts?

The August SMP offers a sense of whether the pressure on real wages might lift. Those forecasts were finalised on 5 August 2026, before the September rate rise, so they do not reflect that decision.

In the forecast table, WPI growth holds at 3.3% through to June 2027, then eases to 3.1% by December 2027, 3.0% by June 2028 and 2.9% by December 2028. Headline CPI inflation, meanwhile, was forecast at 3.6% for December 2026 and 2.8% for June 2027, followed by 2.6%, 2.4% and 2.4%.

Comparing the two paths, headline inflation stays above WPI growth at December 2026 (3.6% versus 3.3%), but the order reverses by June 2027, when forecast WPI growth of 3.3% exceeds forecast headline inflation of 2.8%. From then until the end of 2028, forecast wage growth remains above forecast headline inflation. This is a comparison of two forecasts rather than an RBA statement about real wages, and forecasts can change — but it indicates the period of real wage declines is not assumed to persist indefinitely.

Average earnings per hour are forecast to quicken from 2.7% to 3.0% in December 2026 and 3.7% in June 2027, before easing back to 3.2% by December 2028. Labour productivity, forecast at –0.5% through 2026, is projected to recover to 0.7% by 2028 — relevant because, on the minutes' account, weak productivity is the main source of the unit labour cost pressure.

A rate rise on top of a pay squeeze

Bullock's acknowledgement of real wage cuts came in the same media conference in which she defended a move that adds to borrowing costs for many households. She did not play that down. "Now, I know this decision is difficult for households with a mortgage and businesses with loans," she said.

Her case for acting rests on the risk that inflation becomes entrenched. She said the Board needed to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy", and that "Today's increase in interest rates is needed to slow the economy and return inflation to target."

The RBA's target range is 2–3%, with the aim of reaching the 2.5% midpoint. Bullock said she wants inflation back at 2.5%, where "people are not worrying about it". She also noted that inflation has been outside the target for six years, apart from a brief return inside the band in 2025.

She also left the door open to further moves without committing to any. "I'm not going to give you forward guidance," she said, adding: "The Board will increase interest rates again if that's what's needed to get inflation down."

The bottom line

When Bullock said "They're seeing real wage cuts", she was acknowledging that prices have been rising faster than pay. In the same breath, the RBA made clear it does not regard wages as the engine of inflation; its focus is on domestic capacity pressures and weak productivity. The August forecasts, prepared before the September rise, show wage growth moving back above headline inflation from mid-2027, though those projections will be revisited. The next CPI release, covering September, is scheduled for 28 October, and the next cash rate decision is scheduled for 2.30 pm on 3 November.