Inflation does a job on wage growth, adds heat to rates

But the figure is below the 3.8 per cent in annual inflation to December - the first time wages have not kept up with rising prices since September 2023.

Wages also rose by 0.8 per cent for the final three months of the year, in line with the September quarter.

Treasurer Jim Chalmers remains optimistic about the wages data, despite the drop in real wages.

"While we would have liked to have seen real wage growth, today's result is better than what we inherited," he said.

"This is the longest streak of wages growth above three per cent in more than a decade and a half.

"With inflation higher than we would like, partly due to temporary factors, annual real wages ... fell 0.2 per cent through the year to the December quarter 2025."

EY senior economist Paula Gadsby said the disparity between wage growth and inflation could put more pressure on the Reserve Bank to lift interest rates.

"The wage price index has trended down from its peak of 4.3 per cent at the end of 2023, but broader measures of labour costs paid by employers continue to increase at unsustainable levels," she said.

"We expect the Reserve Bank to increase interest rates further, most likely in the first half of this year, to combat rising inflation and turn around the fall in real wages."

Shadow treasurer Tim Wilson said the figures were further proof of hip-pocket pain impacting Australians.

"The treasurer is engaging in a form of demand denial about his responsibility to drive inflation exceeding wages," he told reporters in Adelaide.

"The government has a very bad track record on making sure they're keeping inflation down.

"They said the economy had turned the corner. It clearly has not."

The bureau's head of price statistics, Michelle Marquardt, said the year to December showed a four per cent boost to public pay packets, compared to 3.4 per cent for those in the private sector.

The figures showed health care and social assistance industries were the main contributors to wage growth for the quarter.

The last quarter coincided with pay rises for aged care workers across Australia, which took effect from October.

The increases marked the final stage of wage rises in the sector following a Health Services Union case lodged with the Fair Work Commission at the end of 2022.

Childcare workers also received a five per cent wage rise in December following a 10 per cent boost in 2024.

Oxford Economics Australia head of economic research Harry Murphy Cruise said wage growth was likely to remain solid due to a tight labour market.

"If capacity constraints persist and employers are simply paying more for the same level of output, stronger wages will translate into higher unit labour costs, prolonging inflation pressures and keeping interest rates higher for longer," he said.