Slowing Wage Growth May Bring Rate Relief Amid Inflation Pressures

Australia's labour market is softening, leading to weak wage growth that could bring relief from inflation and potentially lead to earlier interest rate cuts. According to Stephen Koukoulas, a seasoned economist with 30 years of experience in government, banking, and financial markets, weaker wages could help push prices lower.

The data on total earnings of all employees shows earnings rose by just 2.4% in the year to May 2026, below the inflation rate of 3.6%. This confirms unfolding weakness in the labour market. The Reserve Bank of Australia (RBA) forecasts a continuous deceleration in wages growth until the end of 2028.

The RBA's forecast for the Wage Price Index (WPI) eases from 3.3% to 2.9% by December 2028, suggesting cost-of-living pressures will remain for the next 18 months even if inflation falls back to the target of 2.5% in late 2027.

Koukoulas argues that slower wages growth dampens cost pressures for businesses, which could lead to lower prices and earlier interest rate cuts. However, this scenario also means households will face continued pressure from the cost-of-living squeeze and weak consumer sentiment.