Labour Market & Inflation in Australia: Latest Dynamics & Policy Implications

Australia’s macro-economic narrative in early 2025 is defined by two seemingly contradictory signals. On the one hand, employment continues to rise—32 000 additional positions were created in March—yet the unemployment rate has ticked up to 4.1 per cent. On the other, consumer-price inflation has eased to 2.4 per cent year-on-year, with underlying (“trimmed-mean”) inflation at 2.7 per cent—comfortably inside the Reserve Bank of Australia’s (RBA) target band of 2–3 per cent. This essay reviews the latest data, explains the forces driving both labour-market and price developments, and considers the policy road ahead.

Consolidated dashboard: unemployment, CPI, and wage growth on the left-hand axis (percent), with job-vacancy levels and hours-worked index on the right-hand axis. It lets you scan the entire 2019 Q1 – 2025 Q1 path on a single canvas while preserving each series’ real-world units.

Labour-Market Performance

March’s Labour Force Survey shows total employment rose to 14.57 million, maintaining an employment-to-population ratio of 64.2 per cent. The participation rate, however, slipped 0.1 percentage point to 66.8 per cent, and combined with a 3 000-person rise in unemployment pushed the headline jobless rate up from 4.0 per cent in February to 4.1 per cent.

Beneath the headline, labour utilisation softened. Monthly hours worked fell 0.3 per cent to 1.97 billion, partly reflecting extreme-weather disruptions in New South Wales and Queensland. Underemployment held at 6.6 per cent, but the broader under-utilisation rate edged up to 10.9 per cent, its highest reading since mid-2023. The youth unemployment rate rose 0.4 percentage points to 8.9 per cent, hinting that labour-demand adjustments are occurring first at the margins.

Demand for Labour: Job-Vacancy and Hiring Trends

Forward-looking vacancy metrics confirm a gradual cooling. ABS data show total vacancies fell 4.5 per cent in the three months to February 2025—roughly 15 600 fewer positions—bringing the cumulative decline since the May 2022 peak to almost one-third. Vacancies nonetheless remain 45 per cent above their pre-pandemic level, underscoring that demand, while easing, is still historically tight. Private-sector vacancies declined 5.4 per cent over the quarter, with the steepest annual falls in construction (-34 per cent) and education (-26 per cent); public-sector vacancies actually rose 3.0 per cent, reflecting persistent hiring in health and community services.

Online advertisements tell the same story: Jobs & Skills Australia’s vacancy index slid 5.9 per cent month-on-month in February and 15 per cent over the year, although the absolute number of ads (≈210 000) remains well above the 2014–19 average.

Wage Dynamics and Real-Income Momentum

Nominal wage growth is easing in tandem with vacancies. The Wage Price Index (WPI) rose just 0.7 per cent in the December quarter—its slowest pace in over two years—bringing annual growth down to 3.2 per cent. Private-sector wages grew 3.3 per cent year-on-year; public-sector wages slowed sharply to 2.8 per cent as multi-year enterprise agreements rolled off. Importantly, with consumer inflation now at 2.4 per cent, real wages have returned to marginally positive territory for the first time since mid-2021, supporting household spending power even as nominal gains moderate.

Inflation Trends and Composition

The ABS monthly CPI indicator shows headline inflation slowed to 2.4 per cent in February, down from 2.5 per cent in January and 2.7 per cent in December. Goods disinflation continues to lead the move lower: new-dwelling purchase costs fell 0.6 per cent on the year, and retail fuel prices are 4 per cent below their mid-2024 peak. Services inflation remains stickier—especially in hospitality (4.5 per cent) and insurance (11 per cent)—but is easing at the margin. Food and non-alcoholic beverages were the largest contributor to the annual change (+3.1 per cent), followed by alcohol & tobacco (+6.7 per cent); electricity prices actually declined year-on-year because of expanded government bill-relief programmes.

Underlying measures confirm the trend. Trimmed-mean inflation fell to 2.7 per cent in February from 2.8 per cent in January—the third consecutive monthly decline—and the CPI excluding volatile items and holiday travel is running at 2.5 per cent. Both are within the RBA’s target and well below the 7.8 per cent peak recorded in late 2022.

Labour-Inflation Interplay

The co-existence of a historically low unemployment rate with moderating wages and prices illustrates two forces. First, the post-pandemic supply rebound—easing global logistics costs, strong migration flows boosting labour supply, and a recovery in hours worked—has reduced the structural pressure on both labour costs and goods prices. Second, policy restraint has curbed domestic demand: the RBA lifted its cash rate by 425 basis points between May 2022 and December 2024, and although it delivered a 25 bp cut in February this year, the real policy rate remains restrictive, keeping aggregate demand growth below potential. The slight uptick in unemployment and the pronounced fall in vacancies suggest that the Phillips-curve trade-off may be turning in the central bank’s favour. 

Monetary-Policy Setting and Outlook

In April the RBA left the cash-rate target unchanged at 4.10 per cent, emphasising that “underlying inflation is moderating” but that the near-term outlook is “uncertain”. Market pricing now implies a further quarter-point cut by mid-May, with traders assigning a one-in-four chance of a 50 bp move if forthcoming CPI and labour data continue to soften. The Bank’s own technical forecasts assume a cash rate of 4.0 per cent by June and 3.6 per cent by December. With unemployment projected to peak at only 4.2 per cent and wage growth seen stabilising around 3.4 per cent, the Board believes it can reduce rates without reigniting price pressures, provided global shocks—particularly the renewed U.S. tariff cycle and Chinese growth uncertainties—do not materially weaken external demand or raise imported-cost inflation. 

Fiscal policy will also shape the trajectory. The May federal budget is expected to expand targeted cost-of-living relief (including further electricity rebates) while maintaining a small underlying cash surplus. Such measures are disinflationary in the short run but raise longer-term questions about demand if they become permanent transfers. Meanwhile, robust population growth (≈2 per cent p.a.) will keep pressure on housing rents—now rising 5 per cent year-on-year—and on infrastructure. Thus, inflation risks could re-emerge from the housing-services component even if goods prices stay subdued.

Conclusion

Australia’s macro-mix is moving into a “goldilocks” zone: employment is still expanding, but enough slack is re-entering the labour market to slow wage growth; headline and underlying inflation have returned to the RBA’s target; and monetary policy has begun to pivot from restraint to cautious support. The next few quarters will test the durability of this equilibrium. If vacancies continue to fall and wage growth remains near 3 per cent, the RBA has scope for incremental easing that should keep the economy on a soft-landing path. Conversely, a renewed rise in services inflation—particularly from housing or health—could force a pause in rate cuts. For now, the data suggest the central bank’s “narrow path” to lower inflation and sustained employment growth remains open, but not guaranteed.