Australia's Inflation Rebound Puts RBA on Alert

Australia's inflation journey has taken a notable detour after initially showing progress. At the end of 2022, inflation peaked at 7.9%, but by 2024 and 2025, it had fallen within the Reserve Bank of Australia's (RBA) target range of 2-3%. However, over the past year, both headline and underlying inflation measures have risen back above 3.5%. Governor Michele Bullock highlighted this shift in her statement to the House of Representatives Standing Committee on Economics on 18 September, noting that the progress stalled.

The RBA attributes the recent inflation surge to a mix of global and domestic factors. Governor Bullock pointed to the Middle East conflict, the AI boom, and extreme weather events as key drivers pushing up energy, agricultural, and technology-related prices. The August monthly CPI indicator showed annual headline inflation at 4.0%, with underlying inflation around 3.5% for the past six months. The RBA's response has been to raise the cash rate four times in 2026, bringing it to 4.60%.

Despite the rise in prices, the RBA has ruled out a wage-price spiral as a contributing factor. Governor Bullock emphasized that productivity issues and supply-side constraints are playing a larger role. The RBA remains focused on bringing inflation back to target, with projections indicating that underlying inflation will stay above 3% until mid-2027 before easing to 2.5% by early 2028. The next key updates include the CPI update on 28 October and the November Statement on Monetary Policy on 3 November.

The RBA has warned about the risk of inflation expectations becoming embedded in price-setting decisions. Deputy Governor Andrew Hauser noted that the price level in the economy has risen by 10-20% more than it should have, highlighting the cumulative impact on households. The RBA remains committed to doing what is necessary to bring inflation sustainably back to target, including further cash rate increases if needed.