Australia's Inflation Slowed in July — But Not by Enough

Australia's consumer prices rose 3.5% in the year to July 2026, down from 3.8% in June but above the 3.3% economists had forecast, according to the Australian Bureau of Statistics. The Reserve Bank of Australia's preferred underlying measure, called the trimmed mean, held at 3.6% — unchanged from the previous reading and defying expectations it would ease (The Guardian, 26 August 2026).

The trimmed mean strips out the most extreme price swings to reveal the underlying pace of inflation. Think of it as the temperature after removing the effect of a single hot day: it tells you whether the climate itself is changing, not just whether one reading was unusual. The RBA watches this measure closely because it reflects durable price pressure rather than one-off spikes.

The data arrived a day after minutes from the RBA board's 11 August meeting, where members unanimously held the cash rate at 4.35%. The cash rate is the interest rate the RBA charges commercial banks; changing it is the RBA's main tool for influencing borrowing costs across the economy. The minutes showed several board members considered another rate hike in 2026 "quite possible" and doubted the bank could reach its 2.5% inflation target by the end of next year. The RBA's May 2026 Statement on Monetary Policy had already projected trimmed mean inflation to stay above 3% until mid-2027 before easing to 2.5% by early 2028 (RBA).

Housing and food drove annual inflation through July. Housing costs rose 5.0%, with home building costs up 5.7% and rents up 3.6%, according to ABS figures cited by AMP economist My Bui. Takeaway and restaurant meal prices rose 4.5%, pushed by higher ingredient costs and the minimum wage increase that took effect 1 July. The expiration of fuel excise relief in July sent pump prices up 7.5% in the month, reversing three straight months of declines (The Guardian, 26 August 2026).

The July figure continues a bumpy inflation trajectory through 2026. Headline CPI spiked to 4.6% in the year to March, up from 3.7% in February, before easing to 4.2% in April and 4.0% in May. June's reading of 3.8% had suggested a downward path. Underlying inflation rose to 3.6% annually in Q2 2026, up from 3.5%, though below market forecasts of 3.7% and the RBA's own projection of 3.8% (Reuters, 28 July 2026). The RBA has already delivered three rate rises in 2026, the most recent pushing the cash rate to 4.35% (9 News Melbourne).

Market economists split sharply in their responses. Phil O'Donaghoe, chief economist at Deutsche Bank, said he expected the RBA to raise rates as early as its next meeting in September 2026, calling underlying price growth "intolerably high." AMP's My Bui held to her call for a November hike but conceded a September move was plausible. NAB analysts said their forecast of no further rate hikes was "under review." Brendan Rynne, KPMG's chief economist, said the data suggested the RBA faced "a long, costly grind to get inflation under control without policy action" (The Guardian, 26 August 2026).

CommBank Economics, by contrast, forecast the cash rate to hold at 4.35% through 2026 with no cuts until 2027 (CommBank Economics, 30 July 2026). That call now sits alongside rapidly shifting market expectations.

The divergence among the major bank economists is notable. Deutsche Bank's call for a September hike is the most aggressive, while NAB's shift from a firm hold to "under review" signals that even the dovish camp is reassessing. The RBA minutes already flagged that board members were unconvinced about hitting the 2.5% target on the current trajectory, and the July CPI data — with both headline and underlying measures printing above expectations — reinforces that concern. The sticky underlying figure matters more for policy than the headline number, since the RBA explicitly targets the trimmed mean as its preferred gauge of durable inflation pressure.

Several one-off factors complicate the reading. The fuel excise relief expiry mechanically boosted headline CPI, and the minimum wage increase from 1 July fed directly into restaurant and takeaway prices. These transitory impulses could fade in subsequent months. But building costs at 5.7% and rents at 3.6% reflect structural pressures in housing supply that monetary policy can address only indirectly, and slowly. The question for the RBA board is whether the underlying 3.6% reading, once the excise and wage effects wash through, settles lower or confirms that domestic demand remains too strong at the current cash rate of 4.35%.

The next CPI release, covering August 2026, is scheduled for 30 September at 11:30am AEST. If underlying inflation again refuses to moderate, the case for a September or November hike strengthens materially. The RBA's September meeting falls before that release, meaning the board would be acting on July data and the minutes' own hawkish tilt rather than a fresh CPI print. A November decision, by contrast, would incorporate both August and September inflation figures (ABS).