Inflation Eases Less Than Expected in July, Raising Spectre of Another Rate Hike

Trimmed mean holds steady at 3.6% as wages struggle to keep pace with essential costs

edit

By LineZotpaper

Published26 August 2026

Read Time3 min

Australian inflation slowed to 3.5 percent in the year to July, down from 3.8 percent in June, but the smaller-than-anticipated decline and a steady reading of the Reserve Bank’s preferred underlying measure have left the door open for another interest rate increase, with mortgage holders facing the prospect of further repayment pain.

New data from the Australian Bureau of Statistics released Wednesday showed the consumer price index (CPI) rose 3.5 percent annually in July, a modest drop from the previous month but well short of the 3.3 percent economists had forecast. The trimmed mean, the Reserve Bank of Australia’s favoured gauge of underlying inflation, remained unchanged at 3.6 percent — firmly above the central bank’s 2–3 percent target band.

The figures dealt a blow to hopes that the RBA might soon begin cutting rates, and analysts said the odds of a hike at the board’s next meeting have increased. The RBA has raised the cash rate 13 times since May 2022 to a 13-year high of 4.35 percent.

Electricity prices provided some relief, with annual growth falling sharply from 22.4 percent in June to 6.1 percent in July, reflecting the timing of rebate payments in 2025. However, other essential categories continued to surge. The cost of new dwellings rose 5.7 percent as builders passed on higher labour and material costs, partly driven by demand from data centre construction. Meals out and takeaways increased 4.5 percent, childcare jumped 7.3 percent, education rose 4.8 percent, and hairdressing added 4.4 percent.

The ABS also reported that prices for “non-discretionary” goods and services — items such as food, housing, health, car maintenance, school fees and compulsory insurance — rose 3.7 percent over the year. By contrast, the latest wage price index showed wages grew just 3.2 percent, meaning real wages for many Australians are still falling when it comes to unavoidable spending.

“Households are still under significant pressure,” said John Hawkins, senior lecturer at the University of Canberra. “Wages are lagging the prices of essentials, and that gap is what feeds the sense of a cost-of-living crisis.”

The stubbornness of services inflation, particularly in labour-intensive industries like childcare and hospitality, is a key concern for the RBA. Governor Michele Bullock has repeatedly warned that services prices are slow to adjust and that the fight against inflation is not yet won.

Financial markets reacted cautiously, with the Australian dollar edging up on expectations that rates could stay higher for longer. The ASX 200 fell modestly as interest-rate sensitive sectors retreated.

The next RBA board meeting is scheduled for September 12–13, and the central bank will have one more CPI release — covering the August quarter — before it makes a decision. Economists remain divided, with some arguing that the weakness in household consumption will eventually force inflation down, while others believe a further tightening is needed to ensure the job is done.

Analysis

Why This Matters

Mortgage holders face the real possibility of another rate hike, adding hundreds of dollars to monthly repayments at a time when household budgets are already stretched.
The gap between wage growth and non-discretionary inflation means many Australians are losing purchasing power on essentials, deepening the cost-of-living crisis.
The RBA’s next decision will signal whether it believes inflation is on a sustainable path down or if further demand destruction is required, affecting everything from consumer confidence to housing prices.

Background

Australia’s inflation rate peaked at 7.8 percent in December 2022, prompting the RBA to begin an aggressive tightening cycle. Since May 2022, the cash rate has risen from 0.1 percent to 4.35 percent — the highest level since 2011. Inflation has moderated but remains sticky, particularly in services, due to tight labour markets and strong wage growth in certain sectors. The RBA has been reluctant to cut rates until it sees clear evidence that underlying inflation is sustainably returning to the 2–3 percent target. The July CPI data complicates that narrative: headline inflation fell less than expected, and the trimmed mean barely budged.

Key Perspectives

RBA Board: The central bank has stressed it will not hesitate to raise rates further if inflation proves persistent. Governor Bullock has emphasised the need to see services inflation cool. The steady trimmed mean of 3.6% will give hawks on the board ammunition to argue for another hike.

Australian Households: Households, particularly those with variable-rate mortgages, are bearing the brunt of higher rates. Consumer spending has slowed, and retail sales have been weak. Many families are drawing down savings or cutting back on discretionary spending. A further rate rise would deepen the strain and risk a sharper economic slowdown.

Economists: Views are split. Some, like those at Westpac, see a hike as likely given the data miss, pointing to the danger of inflation becoming entrenched. Others, such as analysts at NAB, argue the lagged effects of past tightening will continue to slow the economy and that the RBA should hold steady to avoid overtightening. The futures market currently prices in about a 40 percent chance of a rate rise in September.

What to Watch

The August quarter CPI release, due in late October, will be the next major data point. If it shows inflation accelerating or staying elevated, a November hike becomes highly probable.
The RBA’s September board meeting statement and minutes for any shift in language, particularly around the outlook for services inflation and household consumption.
Monthly wage price index readings and jobs data: if wage growth accelerates further, the RBA will feel less confident that inflation is under control.

Sources

Inflation eases less than expected, making another interest rate hike more likely — The Conversation – Articles (AU)