Underlying Inflation Hits 3.6% as Public Wages Outpace Output

Trimmed mean inflation has climbed 90 basis points from its trough to 3.6 per cent, and the engine is a public sector paying more while productivity stalls.¹

Updated 4 October 2026: two source links that no longer worked (an old ABS address for the CPI and the renamed public sector employment and earnings release) now open the releases cited. Correction, 4 October 2026: an earlier version said the public sector produces no additional output and that its spending adds no supply; we do not have data on public-sector output, so the article now says public wages are rising while productivity stalls. A source note that described our internal checks has been replaced with a plain citation. Correction, 4 October 2026: an earlier version quoted ASX futures pricing for a 6 October RBA meeting, which is not scheduled; our rate indicator used an outdated meeting calendar. Pricing for the next meeting, on 3 November, as at 4 October: 19.3 per cent chance of a hike, 80.7 per cent hold, no chance of a cut (previously reported as no chance of a hike). Related figures and wording have been corrected; the findings are unchanged. Correction, 3 October 2026: an earlier version said headline CPI fell while underlying inflation rose. Over the year to June 2026 both rose: the trimmed mean from 2.7 to 3.6 per cent and headline CPI from 2.1 to 3.94 per cent (it fell only in the latest quarter, from 4.09 per cent). The deck, opening and caveat have been corrected; the finding on public wages and productivity is unchanged.

Australia's trimmed mean inflation climbed to 3.6 per cent in the June quarter 2026,¹ up 90 basis points in a year,¹ while headline CPI rose to 3.94 per cent from 2.1 per cent.¹

Underneath the headline swings is a structural injection of purchasing power from a public sector whose wages are rising while productivity stalls, now visible in the trimmed mean, the Reserve Bank of Australia's preferred measure of underlying inflation.¹

Public sector wage growth troughed at 2.8 per cent in the December quarter 2024 then re-accelerated to 4.0 per cent by December 2025 -- a 120 basis point rebound in four quarters.² Private sector wages followed a different path: peaking at 4.3 per cent in September 2023 and easing steadily to 3.1 per cent by June 2026, a 120 basis point decline.² The public sector has since retreated 60 basis points to 3.4 per cent, half the distance the private sector covered from its own peak.²

The sector generating those wage gains is not generating matching output. The whole-economy GDP per hour worked index stood at 99.7 in June 2026,³ only fractionally above its March quarter 2019 reading of 98.6.³ The index has not advanced in any sustained way since early 2022.

Annual whole-economy productivity growth ran at minus 0.2 per cent to June 2026.³ The market sector reached an index level of 100.4 over the same period, compared with 96.2 in September 2016, but its annual growth rate was also minus 0.2 per cent.³

The mechanism connecting public wages to trimmed mean inflation is direct. The public sector pays wages growing at 3.4 per cent annually² to a workforce whose size the ABS tracks in its Public sector employment and earnings release.⁵ Those workers spend those wages in the same economy as everyone else, bidding for goods and services whose supply has not expanded to match.

The private sector, which has at least maintained its productivity level, cannot offset that demand injection through cheaper production. The non-market sector adds purchasing power faster than measured supply, which adds to price pressure.³

Treasury's published 2026 Intergenerational Report holds the long-run labour productivity growth assumption at 1.2 per cent per year, identical to the figure used in the 2023 IGR.⁴ The report's own text acknowledges productivity growth has slowed across advanced economies since the mid-2000s.⁴ The measured annual rate at June 2026 is minus 0.2 per cent.³

Sceptics raise four compounding weaknesses in the productivity-drives-inflation framing. First, non-market output is hard to value: much government output is imputed from inputs rather than priced in a market, so its productivity may be understated. Second, the public WPI re-acceleration reflects enterprise agreement timing rather than a durable structural shift: the series has since eased 60 basis points from its December 2025 secondary peak, and calling this persistence may overstate the case.²

Third, the whole-economy productivity index at 99.7 sits below its 2022 peak of 105.0,³ and the flow measure of annual growth is negative in both the whole economy and the market sector, meaning the level divergence between market and non-market is not widening on current data.³ Fourth, market pricing puts only a 19.3 per cent chance on a November hike,⁶ which suggests most investors do not expect the RBA to act on wages and productivity alone.

The resolution mechanism is a hard date. The ABS releases the Australian System of National Accounts 2025-26 on 23 October 2026, shortly before the November RBA board meeting.⁷ That release carries the annual estimates of GDP, productivity and sectoral accounts.⁷

The IGR assumes 1.2 per cent a year;⁴ measured productivity growth is minus 0.2 per cent.³ The market's 19.3 per cent hike probability⁶ will need to price whatever number emerges, before the decision.

The IGR says productivity growth is the key driver of living standards.⁴ Measured productivity growth is minus 0.2 per cent.³

Only one of those numbers is built into the government's 40-year fiscal plan.⁴

Just saying.

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