New analysis finds that profits, not pay packets, are driving the latest inflation spike
Wages are playing a shrinking role in Australia's inflation resurgence, despite mounting concern over pay rises and recent interest rate hikes, according to new research from The Australia Institute.
The think tank's report argues that non‑wage income, particularly company profits, is driving the latest spike in prices, not worker pay packets.
It warns that the Reserve Bank of Australia's (RBA) February decision to lift the cash rate from 3.6% to 3.85% risks punishing households for inflation they did not cause.
The report draws on RBA forecasts and Australian Bureau of Statistics (ABS) national accounts data to decompose the drivers of inflation. It notes that inflation has climbed to 3.8%, with the RBA projecting a peak of 4.2% in mid‑2026 and inflation remaining above three per cent until at least mid‑2027.
Over the same period, however, annual wage growth is forecast to ease from 3.4% in late 2025 to 3.1% by mid‑2026.
"This alone is enough to highlight that wages cannot be the cause of the inflation increases," the researchers said.
By adjusting wage forecasts for productivity and weighting them by labour's 48.5% share of national income, the authors estimate how much of inflation can be explained by unit wage costs.
They find that for the year to December 2025, 3.6% inflation comprised 1.3 percentage points from wages and 2.3 points from non‑wage sources.
By June 2026, with inflation forecast at 4.2%, only 1.2 points are attributable to wages, leaving roughly three percentage points coming from non‑wage income – chiefly profits.
"The spike in inflation forecast to happen in the year to June 2026 is entirely due to non‑wage factors such as company and business profits," the report said.
"The data is clear that the cause of the spike in inflation lies elsewhere, and further rate rises will only serve to hurt workers who have been wrongly blamed for inflation."
Wage growth trends
The findings come amid evidence that wage growth has edged higher but remains contained. ABS Wage Price Index data for the December quarter 2025 shows annual wage growth running at 3.4%, with the public sector leading gains at 3.8% compared with 3.2% in the private sector.
Employers are also reopening salary negotiations but in a disciplined way.
A recent Robert Half report found that 99% of Australian employers are now willing to go above their initial salary offers when hiring, yet most increases remain tightly focused.
Forty per cent of organisations are prepared to lift an offer by six to 10%, with many others capping rises at 10% or less.
This pattern of moderate, role‑specific pay rises contrasts with the broad‑brush wage breakouts often invoked in discussions of a potential "wage–price spiral."
Despite this backdrop, the RBA continues to rely on interest rate rises as its main anti‑inflation tool.
The Australia Institute notes that "because the most common and generally first response to inflation is to raise interest rates, this means that workers and their wages are reflexively the ones not only to be blamed for inflation, but also who are expected to shoulder the burden of solving it."
"The RBA raises interest rates in order to slow household spending and also raise borrowing costs – especially for small businesses – such that businesses will either reduce hours or cut back on employees," it adds.
"This, in turn, will inevitably reduce the pressure on employers to offer higher wages in order to retain or attract workers."
