Inflation slows, but interest rate pressure remains

Australia’s annual inflation rate fell in July, but the latest figures suggest price pressures remain stronger than the headline number might imply.

The Consumer Price Index (CPI) rose 3.5 per cent over the year to July, down from 3.8 per cent in June, according to the Australian Bureau of Statistics.

But underlying inflation, which strips out some of the more volatile price movements, remained unchanged at 3.6 per cent.

CommBank Senior Economist Trent Saunders said the July figures were stronger than expected and provided “less reassurance that underlying inflation is continuing to ease”.

CommBank economists have been warning for some time that inflation pressures remain elevated. In May, the bank said domestic price pressures were already high at the start of 2026 and inflation was expected to remain above target for some time. Earlier this month, CBA Head of Australian Economics Belinda Allen said inflation remained too high and another rate rise remained a risk if price pressures proved more persistent than expected.

What drove annual inflation?

The housing component of CPI, which includes the costs of building and renting property but does not include mortgage repayments, remained the biggest contributor to annual inflation, with prices up 5 per cent over the year.

Food and non-alcoholic beverages rose 3.2 per cent, while recreation and culture prices increased 2.6 per cent.

ABS head of price statistics Rachael McCririck said: “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.”

What became more expensive in July?

Fuel was one of the biggest movers during the month.

“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.

CommBank said the inflation surprise was broader than fuel alone.

Restaurant meals rose 1.2 per cent during July, while clothing and footwear, household furnishings and domestic travel were also stronger than the bank had expected.

Saunders said the renewed strength across a range of domestically influenced prices suggested “the pace of disinflation has stalled”.

Why does underlying inflation matter?

Headline inflation can move sharply when volatile prices such as fuel or electricity rise or fall.

Underlying measures such as the trimmed mean aim to give a clearer picture of how widespread inflation is across the economy.

Trimmed mean inflation remained at 3.6 per cent over the year to July rather than easing to 3.5 per cent as CommBank had expected.

The bank also found that the share of price categories running at an annualised rate above 3 per cent rose sharply in July, from 42 per cent to 58 per cent.

CommBank said that suggested the stronger result was not simply the result of temporary moves in a handful of volatile items.

What could it mean for interest rates?

CommBank’s base case has been that the Reserve Bank of Australia will leave interest rates unchanged, with slower economic activity, some easing in the labour market and the cash rate rises already delivered this year arguing for patience.

But the July inflation result has made that call less certain.

Saunders said the figures raised the risk that further monetary policy tightening could be required.

The bank said another quarterly trimmed mean inflation result of around 0.9 per cent or higher would materially increase the risk of another rate rise later this year.

The next monthly inflation figures, along with upcoming economic growth and labour market data, will now be important in determining whether July was a temporary setback or evidence that inflation is proving harder to bring down.