Inflation dips 0.3% as core pressures linger

Australia’s headline inflation rate slowed to 3.5 per cent in the 12 months to July, but underlying price pressures remained unchanged, prompting economists and market strategists to warn that the Reserve Bank of Australia’s inflation challenge is far from over.

The Consumer Price Index rose 3.5 per cent annually in July, down from 3.8 per cent in June, according to the Australian Bureau of Statistics. However, trimmed mean inflation, the RBA’s preferred measure of underlying price growth, held steady at 3.6 per cent. The result followed the RBA’s decision earlier this month to leave the cash rate unchanged at 4.35 per cent after three increases in 2026.

Housing remained the largest contributor to annual inflation in July, rising 5.0 per cent. Food and non-alcoholic beverages increased 3.2 per cent, while recreation and culture rose 2.6 per cent. ABS head of price statistics Rachael McCririck said rising construction costs continued to underpin housing inflation.

“Housing rose by 5.0 per cent in the 12 months to July due to rising costs for new dwellings. New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour,” McCririck said.

Food inflation was driven by meals out and takeaway prices, which increased 4.5 per cent over the year, while transport inflation accelerated to 1.6 per cent from 0.1 per cent in June as fuel prices rebounded.

“On a monthly basis, Automotive fuel prices rose 7.5 per cent in July after falling for three months in a row. This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July,” McCririck said.

Markets see room for more hikes

The data came in stronger than many market participants had anticipated, reinforcing concerns that inflation is proving more persistent than expected. State Street head of APAC macro strategy Dwyfor Evans said the July figures would place greater scrutiny on the RBA’s recent warnings about inflation risks.

“A stronger than anticipated CPI print for July will put further focus on the RBA’s remarks in its recent minutes that inflation risks are raised. This is borne out in State Street’s high frequency PriceStats data for August, where month-on-month comparisons ranging from 0.5-0.9 per cent by mid-month, largely on higher energy prices. This will keep the tightening debate to the fore and bolster the Australian dollar on a relative rates backdrop,” Evans said.

BNY senior APAC market strategist Wee Khoon Chong said the inflation report reinforced the central bank’s concerns despite last week’s softer labour market data.

“Australia’s July CPI remained sticky, with trimmed-mean inflation unchanged at 3.6 per cent y/y and headline inflation easing less than expected to 3.5 per cent from 3.8 per cent. The data reinforce upside inflation risks and are likely to outweigh last week’s softer employment report. However, the CPI print alone is unlikely to trigger a policy response at the September meeting. We expect the RBA to maintain that policy remains ‘somewhat restrictive’, while reiterating upside inflation risks and its readiness to act if needed,” he said.

“AUD and front-end yields moved higher after the release. With fast-money positioning still short, further AUD short-covering is possible. We maintain a positive AUD outlook.”

VanEck head of investments and capital markets Russel Chesler said the inflation data strengthened the case for another increase in interest rates before year-end.

“With this inflation result, we are of the view that there will have to be at least one more RBA hike this year to temper inflation. Markets appear to have declared the rate-hiking cycle over while the inflation fight is still being waged. They are projecting no further increases this year, despite several members of the RBA’s Monetary Policy Board indicating that another rise may be needed to bring inflation under control,” Chesler said.

He argued that the persistence of trimmed mean inflation was more important than the moderation in the headline figure.

“The inflation fight is far from won. While headline inflation eased from 3.8 per cent to 3.5 per cent in July, the more important trimmed mean remained stuck at 3.6 per cent, well above the RBA’s 2 to 3 per cent target band.”

Chesler said housing, food and recreation remained the key drivers of inflation and warned that strong wage growth could make it difficult for price pressures to ease meaningfully over the coming year.

“Minimum and award wages directly affect around 20 per cent of workers, and we expect these increases to flow through to non-award employees. With unemployment remaining low at 4.5 per cent and job advertisements continuing to rise, services inflation is likely to remain sticky and could increase further,” he said.

The RBA noted in its August decision that oil prices and other commodity costs had risen following conflict in the Middle East, adding to concerns that inflation could remain raised for longer. While the board judged current policy settings were helping to slow demand, it maintained that further action could be required if inflation proves more persistent than forecast.