Unit labour costs rose 3.3 per cent over the year to the March quarter, a pace the Reserve Bank's August Statement on Monetary Policy described as elevated — and one that matters more because productivity is barely growing.

Of all the statistics the Reserve Bank watches, unit labour costs rarely make the evening news. Yet they sit close to the heart of the inflation story. In its August 2026 Statement on Monetary Policy (SMP), the RBA reported that unit labour cost growth was 3.3 per cent over the year to the March quarter, and described that pace as "elevated".

Understanding why requires looking at two things together: what businesses pay their workers, and how much those workers produce.

What unit labour costs measure

In broad terms, unit labour costs capture how much a business spends on labour for each unit of output it produces. They rise when labour costs per worker grow faster than output per worker — that is, faster than productivity.

That makes the measure a useful bridge between wages and prices. If wages rise by a certain amount but each worker also produces proportionally more, the labour cost of making each product or delivering each service need not rise. If productivity stalls, however, wage increases flow much more directly into the cost of production. Businesses then face a choice between absorbing those costs in their margins or passing them on in prices.

A simple illustration, using hypothetical numbers rather than RBA data, shows the mechanics. If labour costs per worker rose by 3.3 per cent and output per worker did not change at all, the labour cost of each unit would also rise by about 3.3 per cent. If output per worker instead rose by 1 per cent, the increase in unit labour costs would shrink to roughly 2.3 per cent.

As a rough yardstick, actual unit labour cost growth of 3.3 per cent sits above the 2.5 per cent midpoint of the RBA's 2–3 per cent inflation target.

Productivity: the missing ingredient

One reason the measure carries weight in 2026 is the weakness of productivity. Governor Michele Bullock did not mince words at her 29 September media conference: "The bottom line is that productivity is doing nothing."

She was equally clear about the limits of her own tools. "monetary policy can't do anything about productivity," she said, adding: "The best thing we can do for productivity is get inflation low and stable".

In her 18 September opening statement to the House of Representatives Standing Committee on Economics, she spelled out the consequence: "Continued weak productivity growth means that the economy cannot grow strongly without putting pressure on inflation." The Board's 29 September statement made a similar point, noting that weak productivity constrains potential growth.

With output per worker barely improving, almost any growth in wages shows up as higher costs per unit. That is the mechanism that turns a moderate-sounding wage outcome into an elevated cost pressure.

Because monetary policy cannot lift productivity, the RBA's lever works on demand: tighter financial conditions are meant to ease the capacity pressures that make it easier for firms to pass costs on. As Bullock put it on 29 September: "Higher interest rates are needed to ensure inflation returns to target."

Wages, agreements and the forecast path

On the wages side, the August forecasts had Wage Price Index growth of 3.3 per cent over the years to June 2026, December 2026 and June 2027, easing to 3.1 per cent by December 2027 and 2.9 per cent by December 2028. The minutes of the August meeting noted that the near-term wage forecast had been "slightly upgraded" due to recent wage decisions and agreements.

Those forecasts were made with a cash rate assumption of around 4.3 to 4.5 per cent. They pre-date the Monetary Policy Board's decision on 29 September to raise the cash rate target by 25 basis points to 4.60 per cent.

Elevated labour cost growth does not, on its own, mean a wage-price spiral. Monetary Policy Board member Iain Ross AO, speaking in a personal capacity on 22 September, concluded that "there is no evidence of the emergence of a wage-price spiral in the present circumstances". Bullock agreed: "I concur with his view that, no, this is not a wage price spiral."

How costs feed into prices

The RBA hears directly from businesses about cost pressures. Bullock said: "Indeed, businesses in our liaison program continue to expect strong increases in their costs over the year ahead." The Board's statement noted that firms are raising or planning to raise prices, and that capacity pressures persist in the economy.

Labour is not the only source of cost pressure. The Board pointed to higher global energy prices linked to a broader Middle East conflict, and AI-related demand pushing up technology goods prices. Bullock told MPs that "Oil and related prices have increased sharply again and will add directly to inflation."

The inflation figures show the result. Headline inflation, measured by the monthly CPI indicator, was 4.0 per cent over the year to August, and the quarterly headline measure was 3.9 per cent over the year to the June quarter. Underlying inflation, measured by the trimmed mean, was 3.6 per cent in the June quarter; Bullock described it as "about 3.5 per cent".

Her diagnosis: "Inflation is too high and has been driven by domestic capacity pressures." Unit labour costs are one gauge of those domestic pressures, because they reflect conditions in Australia's own labour market rather than global commodity prices.

The broader economy offers some context. The August SMP reported GDP growth of 2.5 per cent over the year to the March quarter, and the Board's September statement said output growth has since slowed, though it was stronger than expected in the June quarter. The labour market, it said, has eased broadly as expected.

The bottom line

Unit labour costs growing at 3.3 per cent a year mean the labour cost of producing each unit of output is rising faster than the 2.5 per cent midpoint of the inflation target. With productivity, in the Governor's words, "doing nothing", wage growth translates more fully into business costs — context that helps explain why the RBA describes the pace as elevated.

The Board has said it is focused on preventing high inflation from becoming embedded and will increase the cash rate further if needed, without committing to a path. The September minutes are due on 13 October, the next CPI release on 28 October, and the next decision at 2.30 pm on 3 November.