Inflation slowdown continues, but underlying pressures persist

Editorial Team
05:40pm August 26 2026

New ABS figures show inflation continues to moderate, though housing, food and fuel costs are contributing to price pressures across the economy. (Source: Unsplash)

Australia's inflation rate has continued its gradual softening, but underlying price pressures remain elevated, reinforcing expectations that interest rates could stay higher for longer.

 

The Australian Bureau of Statistics (ABS) has reported a further easing of headline inflation to 3.5 per cent in the 12 months to July, down from 3.8 per cent in June.

 

Housing costs continue to be the biggest driver of annual inflation, rising 5.0 per cent year-on-year.

 

Food and non-alcoholic beverages (3.2 per cent) and Recreation and culture (2.6 per cent) were also cited as key contributors.

 

While headline inflation is moving in the right direction, underlying inflation and a rise in monthly prices suggest inflationary pressures remain.

 

Trimmed mean inflation remained unchanged at 3.6 per cent, well above the Reserve Bank of Australia’s (RBA) target band of 2-3 per cent.

 

The central bank advised in its August meeting it is “not expected to return to around the midpoint of the target range until late 2027.”

 

On a monthly basis, the Consumer Price Index rose 1.0 per cent in July, stronger than Westpac’s expectation of 0.8 per cent.

 

The monthly increase was driven largely by automotive fuel prices rising 7.5 per cent in July after falling for three consecutive months.

 

The ABS attributed the increase to higher global oil prices and the federal government's partially reduced fuel excise relief.

 

RBA likely to maintain cautious stance

 

The latest ABS data will be closely assessed by the central bank ahead of its upcoming September meeting.

 

June’s lower-than-expected inflation figures prompted Westpac to revise its interest rate outlook, with chief economist Luci Ellis now expecting the RBA to keep rates unchanged for the rest of 2026.

 

While the RBA kept rates on hold at 4.35 per cent in August, its post-meeting statement warned future rate hikes aren’t off the table.

 

“The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise,” it said.

 

Westpac economists Justin Smirk and Neha Sharma said today's stronger-than-expected inflation result is likely to keep the RBA alert to the risk of ongoing domestic inflation pressures.

 

However, they noted the RBA is unlikely to view today’s figures in isolation and would instead look to the September quarter CPI to determine whether the July data reflects a temporary adjustment or more persistent inflationary pressures.

 

“One month is not a trend,” Smirk and Sharma said.

 

“As such, we maintain the view that while a November rate hike remains a risk, we do not see it as our base case,” they added.

 

Ellis said the central bank's own forecasts still point to a gradual reduction in inflation.

 

“The RBA is looking for a period of below-trend growth, and ultimately some spare capacity to build up, to engineer the reduction in inflation. Currently its forecasts show the economy to be on track to deliver that outcome,” she added.

 

What’s next?

 

Attention will now turn to the Reserve Bank's September interest rate decision, with today's figures providing fresh insight into the pace of Australia's inflation slowdown.

 

Policymakers will weigh today's results alongside recent labour market data showing unemployment rose to 4.5 per cent in July.

 

While a softer jobs market should help ease inflationary pressures over time by reducing wage and labour cost pressures, today's data suggests underlying pressures remain persistent.

 

While the downward trend is promising for Australia’s inflation outlook, underlying price pressures remain above the RBA's comfort zone, supporting expectations that policymakers will stay cautious in the months ahead.

 

For households and businesses hoping for interest rate relief, the latest figures suggest patience may still be required.

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