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Wages Growth -v- Inflation: Are wages lagging inflation, or driving it? Public -v- Private sector?

26 Sep 2025 11 month(s) ago

 

  • There has been much media commentary around public sector wages driving inflation. The facts reveal a different picture.
  • It is true that public sector wages growth (red line in the main chart) is currently running ahead of the private sector (green line), but that has only been the case this year.
  • However, in the previous four years since 2020 (Covid lockdowns), public sector wages lagged the private sector. 
  • Over the past 10 years, wages in both the public and private sectors have lagged inflation (grey line), by similar margins. Ie there has been a decline in REAL wages in both sectors. The main reason is that both are yet to catch up to the inflation surge in 2021-3.
  • Prior to the Covid stimulus inflation surge, public and private sector wages both grew well AHEAD of inflation, with public sector wages beating private sector.
  • Private sector wages growth is more volatile and suffers more in economic slowdowns – eg the 2008-9 GFC, 2014-5 China slowdown, Covid lockdown recession.
  • Productivity matters!
  • The lower chart shows average wages growth and inflation per decade. In the 2000s and 2010s decades, public sector (red) and private sector wages (green) both grew AHEAD of inflation (grey), with public wage growth beating private.
  • Wages growth ahead of inflation did not increase inflation because of productivity gains. Inflation and interest rates declined steadily up until Covid while real wages increased.
  • However in the 2020s decade thus far, public and private sector wages have both LAGGED inflation, with public sector wages lagging by a larger margin.
  • The problem is that in the current era of zero productivity gains, wages growth running ahead of inflation is likely to keep upward pressure on inflation and therefore interest rates.
  • Will ‘ai’ magically boost productivity, to increase output per worker, reduce inflation, and boost real wages? Time will tell, but I am not as optimistic as many.

Till next time . . . . safe investing!

 

For my most recent monthly update on local & global markets for Aussie investors, including inflation and interest rates - see:

 

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