Australia's Inflation Outlook
Australia's Q2 2025 CPI Unexpectedly Falls, Easing RBA Rate Pressure Amid Persistent Drivers
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Key Points
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Electricity costs remain the single largest contributor to annual inflation, with electricity prices up 22.4% year on year in June 2026, largely due to the end of government rebates.
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New dwellings inflation reached 5.8% year on year in June 2026, the highest level in almost three years, driven by higher material and labour costs.
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Holiday travel and accommodation prices rose 4.6% in June 2026, reflecting increased travel to the northern hemisphere and higher jet fuel prices.
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RBA-dated OIS pricing shows tightening across meetings with the probability of a 25 basis point hike rising to about 48% by December 2026, indicating market expectations of higher rates despite softer near-term data.
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Profits of large industrial enterprises surged in the first five months of the year, with electronics profits up 103.9% year on year and non-ferrous metals profits up 117.1%, contributing to an 18.8% YoY rise in overall industrial profits.
Australia's inflation unexpectedly fell in the second quarter of 2025, with the consumer price index dropping 0.1% quarter-on-quarter, according to Tri-City Herald. The annual rate came in at around 2.8%, moving closer to the Reserve Bank of Australia's target band but not enough to shift policy just yet.
The softer print pushed Australian bond yields lower and weighed on the Aussie dollar. Markets quickly repriced RBA expectations, with bets growing that the central bank could hold its cash rate at 4.35% at its next meeting, Ledger-Enquirer reported.
Fuel Costs Drive the Surprise CPI Drop
The quarterly fall was driven largely by a drop in fuel costs from recent peaks. The CPI rose just 0.6% in the prior quarter after a 1.4% jump, showing a clear slowdown in price pressures, according to Kansas.com. That deceleration gave markets room to expect a pause in rate hikes.
Core inflation — which strips out volatile items — also undershot forecasts. The trimmed mean, the RBA's preferred measure of underlying inflation, held near 3.6% year-on-year as of June 2026. That figure remains above the RBA's 2–3% target band, signalling that the inflation fight is not over, Star-Telegram noted.
Housing and Electricity Keep Inflation Stubbornly High
Despite the softer headline number, several categories kept pushing prices up. Electricity costs rose 22.4% year-on-year in June 2026, making it the single biggest driver of annual inflation. The jump was largely due to the end of government energy rebates that had previously cushioned household bills.
New dwelling costs climbed 5.8% year-on-year — the fastest pace in nearly three years — as builders passed on higher material and labour costs to buyers. Holiday travel and accommodation added to the pressure, rising 4.6% over the year, fuelled by increased northern hemisphere travel and higher jet fuel prices, according to The News Tribune.
Markets Bet on a Rate Hold, But Hike Risk Lingers
Traders moved quickly after the data dropped. RBA-dated overnight index swap pricing showed the probability of a 25 basis point rate hike rising to about 48% by December 2026. That means markets see the RBA as nearly coin-flip likely to raise rates later in the year, even as near-term cuts get priced out.
The weighted median CPI rose 0.7% in the second quarter of 2026 and 3.7% annually — both above target. The RBA must now weigh sticky underlying inflation against slowing growth and wage dynamics. A hold at 4.35% looks most likely for the next meeting, but the path beyond that remains uncertain, Ledger-Enquirer noted.
What the RBA Watches Next on Inflation
The central bank will focus on whether underlying pressures ease in coming quarters. Trimmed mean inflation at 3.6% gives the RBA limited room to cut rates without risking a rebound. Wages growth and housing costs will be key data points to watch heading into the back half of 2026.
The Q2 2025 miss was welcome news, but one soft quarter does not change the RBA's calculus. Persistent inflation above 3% in core measures means the board is likely to stay cautious, keeping the door open for another hike if price pressures fail to cool further, according to Star-Telegram.
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