Inflation eases less than expected, making another interest rate hike more likely

John Hawkins, University of Canberra

Easing inflation may give mortgage holders a reprieve on further repayment increases for now – but maybe not for long.

The consumer price index (CPI) rose 3.5% in the year to July, down from 3.8% in the year to June. But that was a smaller fall than had been predicted.

The Reserve Bank of Australia’s preferred measure of underlying inflation, the trimmed mean, was unchanged at 3.6%. (The trimmed mean is the average rate of inflation after “trimming” away the items with the largest price rises or falls, leaving the weighted average of the middle 70% of items.)

The prices of what the Australian Bureau of Statistics (ABS) terms “non-discretionary” purchases – such as food, shelter, healthcare, car maintenance, school fees or compulsory insurance – rose by 3.7%.

This compares to the latest annual increase in wages of 3.2%. This means wages are still lagging price increases that are hard to avoid, adding to cost of living pressures on Australian households.

What’s changed?

The latest data showed headline annual inflation benefited from lower growth in electricity prices (part of the “housing” group shown in the chart below, which shows the breakdown of cost changes within the CPI).

The annual increase in the cost of electricity fell back from 22.4% in June to 6.1% in July, reflecting the timing of rebate payments in 2025.

Fresh vegetables and eggs cost less in July 2026 than in July 2025. But the cost of meals out and takeaways was up 4.5%, reflecting higher costs of ingredients and the increase in the minimum wage.

There were also strong increases in some other labour-intensive services, such as childcare (up 7.3%), hairdressing (up 4.4%) and education (up 4.8%).

New dwelling prices were up 5.7% as builders passed through higher labour and material costs.

The surge in construction of data centres is one factor that’s continuing to push up construction costs, which the Reserve Bank is closely watching.

How interest rates factor in

Interest rates are not included as part of the “basket of goods and services” that measure inflation. Instead, interest rates are captured separately in the Living Cost Indexes.

For the third of households with a mortgage, rates going up three times this year are an additional cost of living pressure on top of these latest CPI figures.

When announcing its decision to keep interest rates on hold at 4.35% earlier this month, the Reserve Bank sounded a warning about inflation still being too high for comfort, noting:

Some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so.

Fuel costs and inflation

Although petrol prices rose in July, they were marginally lower than a year ago.

The federal government had halved the petrol excise in April, lowering petrol prices by 32 cents a litre. Half of this discount was removed in July, the month covered in this latest data.

The remainder was removed on August 3, adding around 16 cents a litre, or about 8%, to petrol prices.

Given petrol accounts for a bit over 3% of household spending, this will have directly added about 0.2–0.3% to inflation in July – and will again in August.

The other main influence on petrol prices is the global oil market. The price gyrations there are largely driven by views on the likelihood of peace in the Middle East and, to a lesser extent, the damage Ukraine is doing to the infrastructure in Russia.

It remains hard to predict what will happen in either region. Almost six months after the US launched its war with Iran, there is little sign of a lasting deal that would fully reopen the Strait of Hormuz.

Reserve Bank board minutes released yesterday noted that “global inventories of oil and oil products were much lower than at the start of the conflict”. This suggests further shocks could have larger price impacts.

What it means for interest rates

The latest Reserve Bank forecasts have inflation dropping from 3.9% in the June quarter to 3.6% in the December quarter. Similarly, the trimmed mean measure drops from 3.6% to 3.3%.

Both are projected to return to the middle of the bank’s 2-3% target band by late 2027. These forecasts assume the cash rate target is unchanged.

Today’s headline inflation numbers are consistent with that forecast trajectory. The Reserve Bank may be disappointed, however, that there was no fall in the trimmed mean.

On balance, today’s numbers are unlikely to lead the Reserve Bank board to lift rates at its next meeting on 29 September.

Financial markets’ expectations are also that the bank will most likely leave interest rates steady in September. But they are still pricing in the possibility of one more increase at a later meeting.

By the time the board meets on 3 November, Melbourne Cup Day, we’ll have seen the inflation figures for the September quarter. Those will be a key influence on the bank’s decision.

As the Reserve Bank’s Deputy Governor Andrew Hauser warned last week,

if we don’t see inflation coming down we will, and we’ll have to, raise interest rates again.

Read more: RBA holds rates steady as the housing market softens. But another hike is still possible

This article is republished from The Conversation under a Creative Commons license. Read the original article.