Inflation remains elevated Down Under, signaling that a near-term interest rate reduction isn't likely to arrive anytime soon.
On Wednesday, the Australian Bureau of Statistics (ABS) released the latest consumer price index (CPI), revealing that both headline CPI and trimmed mean inflation, while moderating, are still above the Reserve Bank of Australia's (RBA) target inflationary range.
In the 12 months leading up to July, headline CPI was up 3.5%, down from 3.8% in the lead up to June. Meanwhile, trimmed mean inflation — which many economists consider a better indicator of inflationary pressures because it strips out goods with volatile price changes — was up 3.6%, unchanged from the year leading up to June.
The RBA has raised the official cash rate three times so far in 2026, taking rates to the current level of 4.35%. Yet despite inflation continuing to sit above the RBA’s target range, the central bank has kept rates on hold at its last two meetings, signalling that it wants more time to assess how previous rate hikes are working their way through the economy before deciding on its next move.
Higher interest rates are hardly welcome news for mortgage holders and investors across the country, many of whom are already contending with elevated living costs. But there was at least some relief at the August meeting with the RBA not deciding to maintain the current rate.
Still, many Australians had been hoping the next move might be a cut. That hope took a hit with the release of the RBA’s August meeting minutes on Tuesday, which revealed that the central bank did not consider cutting rates at its most recent meeting. The RBA has repeatedly said it will not consider reducing rates again until inflation is back within the target band of 2% to 3%.
Furthermore, RBA Governor Michele Bullock said after the August meeting that the bank would consider raising interest rates again, "if that is what is required to bring inflation down in a timely way."
RBA Deputy Governor Andrew Hauser reiterated Bullock's warning while speaking at an event in Brisbane, saying that the conflict in the Middle East, investments in artificial intelligence and weak productivity growth in Australia are all potential sources of further inflationary pressure.
“If those upside risks to inflation crystallise and we don’t see inflation coming down, we will — and we will have to — raise interest rates again,” Hauser said.
The RBA’s August meeting minutes reinforced that message, making clear that the board remains prepared to raise rates if inflationary pressures intensify: "In finalising its statement, the board agreed to remain attentive to the data and the evolving assessment of the outlook and risks when making its decisions. The board will remain focused on its mandate to deliver price stability and full employment and will continue to do what it considers necessary to achieve that outcome, including increasing the cash rate target if upside risks materialise."
The largest contributors to the July print were housing, up 5%, year-over-year, in seasonally-adjusted terms, followed by clothing and footwear, education, and alcohol and tobacco products.
New dwelling prices eased slightly, with an increase of 5.7% in the 12 months to July, compared with 5.8% in the lead up to June, but still above the RBA's target range. The uptick was driven by home builders raising prices to cover higher labour and material costs.
Rents also continue to be elevated, up 3.6% in the year, the same as both June and May's print, while utilities rose 6.1% and insurance increased 4.2%, annually.
By capital city, Hobart recorded the highest annual inflation rate at 4.5%, followed by Adelaide at 4.4%. Sydney, Melbourne and Canberra recorded the lowest, with inflation at 3.2%, year-over-year.
Other factors are also likely to influence the RBA’s next move on monetary policy, particularly the labour market. Australia’s unemployment rate edged up to 4.5% in July, up from 4.4% the month before, suggesting some softening in employment conditions. A weaker labour market could take some pressure off inflation by reducing wage and spending pressures, potentially giving the RBA more room to consider interest rate cuts. However, if inflation remains stubbornly high, the central bank may be reluctant to ease policy even as unemployment rises.
The RBA's next meeting on monetary policy is scheduled for the 28 and 29 of September.
