It is a somewhat disconcerting revelation that wages in Australia during 2025 increased by a mere 3.4%, a figure that falls short of the annual inflation rate of 3.8%. This disparity highlights a troubling trend where workers are experiencing a decline in their real purchasing power, as noted by economist Greg Jericho. The situation is exacerbated by the Reserve Bank of Australia's (RBA) persistent inclination to attribute rising prices to wage growth, despite mounting evidence to the contrary.
The Persistent Wage Stagnation and RBA's Response
For decades, Australia has witnessed a notable absence of significant wage breakouts, a phenomenon that has persisted since many workers were in primary school. The RBA, however, remains vigilant, often raising interest rates in an effort to curb inflation by increasing unemployment and suppressing wage growth. Earlier this month, the RBA justified a rate hike by citing that wage growth had slowed only gradually and unit labour costs remained high, indicating a tight labour market. This perspective suggests that employers are compelled to offer better wages to attract workers, which the RBA believes fuels inflation.
Real Wage Decline and Its Implications
The latest data reveals that for the first time in over two years, the annual growth of real wages—adjusted for inflation—has turned negative. This means that prices are rising faster than wages, making it logically impossible for wages to be the primary driver of inflation. The erosion of real wages has left many Australian workers feeling that the economic system is skewed against them, with their financial well-being deteriorating despite ongoing economic activity.
Profit-Driven Inflation Takes Center Stage
Analysis by David Richardson of the Australia Institute, using the RBA's own forecasts, demonstrates that wage growth is not the culprit behind rising inflation. Instead, the focus shifts to non-wage factors, predominantly company profits and small business income. This "profit-push" inflation, which was a significant contributor in 2021 and 2022, has re-emerged as a key driver of current inflationary pressures. The RBA's February statement indirectly acknowledged this by noting that strong demand allowed retailers to increase prices beyond what would be expected from changes in import costs, essentially pointing to profit maximization as a factor.
Corporate Profits and Economic Disparities
Recent corporate announcements underscore this trend. For instance, JB HiFi reported a 7.1% increase in net profit for the half-year, while the Commonwealth Bank announced a half-yearly profit of $5.45 billion, up by 7%. These profit growth rates outpace inflation, yet they are often overlooked in discussions about price rises. This disconnect raises questions about the fairness of economic policies that penalize workers through higher interest rates while corporate profits flourish.
The Long-Term Impact on Workers
The value of average real wages in Australia is now equivalent to what it was 15 years ago and has declined by over 4% since March 2021. Compounding this issue, the RBA forecasts that real wages will remain essentially flat for the next two years. Given the central bank's active efforts to prevent wage growth from exceeding inflation, it is understandable why many workers perceive the economy as rigged against them. This sentiment is fueled by a cycle where interest rate hikes, intended to control inflation, further squeeze household budgets without addressing the root causes of price increases.
In summary, the Australian economic landscape in 2025 is marked by a stark contrast between stagnant wages and rising inflation, driven largely by profit-oriented practices. As workers grapple with diminished purchasing power and the RBA continues to prioritize interest rate adjustments, the need for a more balanced approach to economic management becomes increasingly apparent. The ongoing debate highlights the critical importance of addressing profit-driven inflation to ensure a fairer distribution of economic gains.
