Key Highlights

  • The RBA forecasts headline Inflation at 4.5 per cent and wage growth at 3.4 per cent over the year to December 2026.
  • That gap implies a fall in real wages, driven largely by energy prices.
  • Purchasing power is expected to recover from 2027 under the forecasts.
  • Wage gains are smaller than the upgrade to near-term inflation.

"It makes everyone's pay packets and savings worth less".

Governor Michele Bullock used those words in her opening statement to the Senate Economics Legislation Committee on 28 October 2026, describing the effects of high inflation. Less than a week later, the Reserve Bank of Australia's November Statement on Monetary Policy put numbers on that idea. Its forecasts show the wage price index (WPI) growing 3.4 per cent over the year to December 2026, while headline consumer price inflation is forecast to reach 4.5 per cent over the same period.

When prices rise faster than wages, real wages — pay adjusted for the cost of living — fall. This explainer sets out what the RBA's forecasts imply for real pay, and why.

Two forecasts, one gap

All figures below are RBA forecasts, year-ended, from the November 2026 Statement on Monetary Policy:

  • December 2026: WPI 3.4 per cent; headline CPI 4.5 per cent
  • December 2027: WPI 3.2 per cent; headline CPI 2.7 per cent
  • December 2028: WPI 2.9 per cent; headline CPI 2.4 per cent

A rough way to gauge real wage growth is to subtract inflation from nominal wage growth. On that simple measure, real wages would fall by about 1.1 percentage points over the year to December 2026, then rise by about 0.5 percentage points in each of the following two December years. This is arithmetic on the RBA's published forecasts, not an RBA estimate of real wages.

The comparison changes depending on which inflation measure is used. Against the RBA's trimmed-mean forecast of 3.6 per cent for December 2026 — the underlying measure that strips out the largest price rises and falls — the WPI forecast of 3.4 per cent is only slightly lower. The wider gap with headline CPI is where energy comes in.

Why prices are running ahead

The headline inflation forecast for December 2026 has been revised up sharply, from 3.6 per cent in August to 4.5 per cent. The Statement says the inflation outlook has been "revised materially higher" and that higher energy prices stemming from the Middle East conflict have added to pressures. The RBA's oil price assumption for the December quarter 2026 is 35 per cent higher than in August, with Brent Crude assumed at US$109.5 a barrel.

The Monetary Policy Board's statement noted that "The Middle East conflict remains unresolved". The Statement on Monetary Policy assumes refined fuel margins return to historical averages by mid-2027, about two quarters later than assumed in August, with energy cost pressures expected to ease from mid-2027, though by less than in August.

That timing explains much of the shape of the real wage forecasts. Headline inflation is forecast to peak at 4.5 per cent in the December quarter 2026 and then fall to 3.7 per cent by June 2027 and 2.7 per cent by December 2027. As energy pressures ease, wage growth is forecast to move back above headline inflation.

The latest actual data show the squeeze is already under way:

  • The WPI rose 3.2 per cent over the year to the June quarter.
  • Headline CPI rose 3.9 per cent over the year to the September quarter, unchanged from the June quarter.
  • The monthly headline CPI indicator rose 4.3 per cent over the year to September 2026.
  • Trimmed-mean inflation was 3.7 per cent over the year to the September quarter.

Because headline CPI was also 3.9 per cent over the year to the June quarter, wage growth of 3.2 per cent over that same period means real wages were already falling on the simple measure before the forecast peak in inflation.

Wages are rising faster than before — just not fast enough

The RBA has revised its wage forecasts higher across the forecast period, citing tighter capacity, higher inflation and inflation expectations. Its Business liaison contacts report elevated wage expectations, pointing to little easing over the next year.

That might sound like good news for workers. But the upgrade to wages is much smaller than the upgrade to near-term inflation. From the Bank's perspective, faster wage growth also carries a risk: the Board's majority reasoning was that "there is an increasing risk that higher inflation expectations will become embedded." If wages and prices chase each other upward, inflation could take longer to return to the 2–3 per cent target.

The household squeeze, and what could change it

Real wages are only one part of household finances, but the broader household forecasts tell a similar story. The RBA expects real household Disposable Income growth to slow to 1.0 per cent by December 2026, before picking up to about 1.3–1.5 per cent through 2028. Household consumption growth is forecast at 1.4 per cent in December 2026, and the consumption outlook has been revised lower. The household saving rate is forecast at 6.6 per cent in December 2026.

Governor Bullock described the everyday impact of inflation in her Senate statement: "It means higher grocery costs, higher rent, and higher electricity bills." Higher interest rates add to the pressure for borrowers. On 3 November, the Board raised the cash rate target by 25 basis points to 4.85 per cent — the fifth increase of 2026, taking the total rise this year to 125 basis points. Lenders set their own rates, so the effect on individual loans varies.

The RBA's forecasts are conditioned on a cash rate path based on market pricing as at 28 October 2026, not on a promise from the Board, and they carry wide uncertainty. In the Bank's energy and expectations scenario, Crude Oil staying around US$100 a barrel with elevated refined product prices would leave underlying inflation around 2¾ per cent by end-2028 rather than about 2½ per cent. Conversely, the Statement says inflation could fall faster if higher rates and falling housing prices weigh on spending.

The bottom line

The RBA's forecasts put headline inflation at 4.5 per cent and wage growth at 3.4 per cent over the year to December 2026, implying a fall in real wages. The gap is driven largely by energy prices linked to the Middle East conflict and is forecast to reverse from 2027, when wage growth is expected to exceed headline inflation again. As the Governor put it, "High inflation hurts everyone." Whether real pay recovers on the RBA's timetable depends heavily on energy prices and on inflation expectations staying anchored.