RBA’s 3.6% Core Inflation Print Puts Another 25bp Hike Back on the Table
A 3.5% inflation headline is the sort of number politicians celebrate and borrowers misread. The number that matters is 3.6%: Australia’s underlying inflation has refused to move.
Australia’s 3.5% inflation headline is the sort of number politicians celebrate and borrowers misread. The number that matters is 3.6%: underlying inflation has refused to move.
That is not a technicality. It is the difference between the Reserve Bank of Australia being finished with rate rises and being forced to deliver one more 25-basis-point kick to an economy already wobbling under 4.35% rates.
The headline got prettier. The problem did not.
Australia’s monthly CPI rose 1.0% in July, after falling 0.1% in June. That was stronger than the 0.8% increase economists expected. The annual headline rate fell from 3.8% to 3.5%, but largely because a large July 2025 increase dropped out of the annual comparison.
That is called a base effect. It is real arithmetic and lousy economics if you mistake it for victory.
Fuel prices jumped 7.5% in July after three consecutive monthly falls. Travel costs also rose. Those moves helped push the monthly number higher. Fine. Fuel moves around; everyone knows that. But the trimmed-mean measure, which strips out some of the volatile rubbish and is the RBA’s preferred read on persistent inflation, rose 0.5% in the month. That was the biggest monthly increase in a year and well above the 0.3% forecast.
Its annual rate stayed at 3.6%.
So the clean version is this: Australia’s inflation problem did not get worse in the loud, ugly way the headline number suggests. But it also did not get better in the way households, markets and Canberra desperately wanted.
The RBA’s target band is 2% to 3%. Underlying inflation at 3.6% is not mission accomplished. It is still a central bank saying, “We’ve got work to do.”
Why 3.6% matters more than 3.5%
Most people look at the largest number on the news graphic and stop there. That is understandable. It is also how you end up making poor financial decisions.
Headline CPI tells you what household prices did. Trimmed mean attempts to tell you whether inflation is becoming embedded across the economy. The latter matters more for interest rates because central bankers cannot sensibly hike every time petrol gets expensive for a month, nor can they declare peace every time oil briefly falls.
The RBA already knows it has a sticky problem. At its August 11 meeting, it held the cash rate at 4.35% after three 25-basis-point increases this year: February took the rate to 3.85%, March to 4.10%, and May to 4.35%.
The Board did not hold because it thought the job was done. It held because policy was already “somewhat restrictive” and it wanted time to see whether the earlier rate rises would slow demand enough.
That was a reasonable call two weeks ago. July’s CPI does not make it unreasonable. But it does make the next decision harder.
Before this release, markets saw little chance of a September increase and priced roughly a 50% chance of one more hike by year-end. After the data, the market-implied chance of a hike next month rose to 27% from 17%, while a move by February was priced at 80%.
That is the market doing what markets do: revising the story when the facts change. Borrowers should do the same.
The RBA is stuck with the worst kind of inflation fight
Here is the nasty bit. Australia does not have an obviously booming economy that can absorb endless rate rises without drama.
The RBA says growth is slowing. Housing prices have fallen from their March peak. Demand for new housing loans has weakened, particularly among investors. Scheduled mortgage payments as a share of household disposable income are near their 2024 peak and expected to rise a little further as earlier increases flow through.
At the same time, unemployment rose to 4.5% in July, its highest level since late 2021. That normally gives a central bank room to breathe.
But inflation is not behaving itself. The RBA has repeatedly flagged capacity pressures, weak productivity and the pass-through of energy-related costs from the Middle East conflict. Its August forecasts had trimmed-mean inflation easing to 3.3% by the end of 2026. July’s annual result is still 3.6%, and the monthly core increase went the wrong way.
That leaves Michele Bullock and the Board with a rotten menu:
- Hike again, and risk leaning harder into weakening housing, confidence and employment. - Hold too long, and risk higher prices becoming normalised in wages, contracts and business pricing. - Pretend a better-looking headline CPI solves the problem, which would be the politically easy and economically stupid option.
Central banking is not about making people happy. It is about choosing which pain is less destructive.
The overlooked issue: businesses are still passing costs on
The popular story is that households are smashed, therefore companies cannot raise prices. That is only half true.
Some businesses absolutely are absorbing costs because their customers are tapped out. Others are still pushing them through, especially where competition is weak, supply is constrained or the purchase is unavoidable. The RBA has specifically pointed to elevated market-services inflation, cost pressures and weak productivity as part of the underlying problem.
That weak productivity point matters enormously. If output per worker is poor, wages and inputs rise, and businesses still want to protect margins, prices go up. You can blame corporate greed, workers, landlords, government spending or a war-driven oil shock until you are blue in the face. A country that produces too little per hour has less room to pay itself more without inflation.
That is not ideological. It is maths.
For founders and operators, this is where the lesson becomes useful. You cannot price your way out of a mediocre business forever. If you are passing through every cost increase because your operation has no productivity buffer, you are making yourself vulnerable to the moment customers finally push back.
The better businesses are doing three things now: cutting waste before it becomes a crisis, protecting gross margin where they have genuine pricing power, and investing in systems that let the same team produce more. Boring, yes. Profitable, also yes.
Don’t bet your life on a rate cut that has not arrived
The contrarian point is that another hike is not the only risk. Rates may simply stay high for longer than people expect.
That can be just as painful for a household or business that has built its plans around imminent relief. The RBA’s own forecasts do not have inflation returning to the middle of its 2%–3% target range until early 2028. Even if the next move is not up, that is hardly a flashing green light for cheap money.
Plenty of people will hear “headline inflation fell to 3.5%” and immediately resume shopping for a larger house, a leveraged investment property or a business acquisition that only works if debt gets cheaper soon.
That is how people end up selling good assets at bad prices.
A 4.35% cash rate is already restrictive. The RBA has acknowledged that. But restrictive does not mean temporary, and it certainly does not mean you get a bailout because your spreadsheet assumed a 2027 rate-cut parade.
What this means for you
First, stress-test your personal and business cash flow for another 25 basis points. Not because I am telling you a hike is guaranteed, but because pretending it is impossible is amateur hour. If that extra cost breaks your plan, your plan is already broken.
Second, separate volatile price movements from persistent ones. Fuel may drop next month. That will not automatically fix wages, insurance, rent, services or poor productivity. Make decisions based on the costs that stay, not the ones that make headlines.
Third, if you run a business, stop using “inflation” as an excuse for sloppy operations. Audit your margin by product, customer and channel. Identify where you have real pricing power and where you are merely hoping customers will cop it. Then fix the labour, procurement and process leaks you have tolerated while sales were growing.
Fourth, keep liquidity. High-rate periods punish people who need to refinance, raise capital or sell in a hurry. Cash buys you time, and time is often the difference between making a rational decision and taking a desperate haircut.
The headline says Australian inflation is cooling. Good.
The core number says the RBA is not yet free to relax. That is the number I would build around.