Australian Inflation in Focus: Trends, Risks, and What Comes Next

Australia’s inflation landscape has shifted notably over the past year, reflecting a balance between global economic uncertainty and domestic adjustments in policy and consumer habits. In this article, we’ll explore recent data on consumer prices, look at inflation expectations, and consider the implications for households, businesses, and the broader economy heading into late 2025.

Recent Inflation Data Highlights

Australia entered the second half of 2025 with annual inflation at its lowest since early 2021. Over the twelve months to the June 2025 quarter, the Consumer Price Index (CPI) rose by 2.1%. On a quarterly basis, prices increased 0.7%, signaling that while price growth has slowed, inflationary pressures have not disappeared.

The key drivers behind this moderation in inflation are nuanced:

• Housing costs led the quarterly price rises, increasing by 1.2%. This reflects both persistent rental pressures and ongoing housing affordability challenges.

• Food and non-alcoholic beverages rose by 1.0%, while the health sector saw even sharper increases at 1.5%. Higher food prices continue to affect households, driven by upticks in the cost of meat, seafood, fruits, and vegetables.

• Transport costs provided partial relief, falling by 0.7% over the quarter, a figure influenced by fluctuating petrol prices.

It’s important to note that despite the deceleration, some pockets of inflation remain elevated—especially within the services sector, although here too, the pace has eased compared to previous quarters.

Inflation Expectations: What Consumers and Analysts Foresee

Inflation expectations have a major influence on both personal spending patterns and the Reserve Bank of Australia’s monetary policy decisions. Recent surveys show a mixed but overall stabilizing picture:

• The weekly ANZ-Roy Morgan Inflation Expectations index stood at 5% for late August 2025. This is slightly above July’s level, but below peaks seen earlier in the month. The broader trend since July 2024 has been relatively stable, fluctuating within a narrow 4.2%–5.2% band.

• The Melbourne Institute’s August survey indicated a notable drop in expected inflation, with its 30% trimmed mean measure falling to 3.9%. This is a significant improvement and suggests that, after a period of heightened uncertainty, households may be gaining confidence that inflation will settle.

• Meanwhile, the Reserve Bank of Australia’s own forecasts indicate that inflation is expected to remain within its target range of 2–3% over the next few years. This is key for financial stability and long-term economic planning.

Drivers and Risks: Why Inflation Has Moderated—And What Could Change

Several factors have contributed to the recent moderation in inflation:

• Interest rate policy: The RBA’s series of hikes in recent years helped dampen demand, curbing persistent inflation without triggering a deep downturn. At its August 2025 meeting, the RBA lowered the cash rate to 3.60%, reflecting the view that inflation is now around target and economic growth could use a boost.

• Energy and petrol prices: Costs for electricity surged due to changes in energy rebates, but average petrol prices nudged higher to $1.80 per litre in July, their highest since March. The interplay of these forces will continue to sway household budgets as global energy markets remain volatile.

• Global factors: Slower international growth and lingering trade uncertainties present risks. However, compared to a year ago, fears of a sudden global shock appear to have eased.

• Rents and housing: The rental market remains tight, particularly in the capital cities, and is a key source of ongoing inflationary pressure. Any future changes in migration, supply constraints, or government interventions could quickly alter the outlook.

What Lies Ahead?

Looking forward, several trends are worth watching:

• Inflation is expected to remain contained in the near term, with the RBA and major forecasting bodies projecting annual rates between 2–3%. This aligns Australia with the central banks’ preferred target bands and should support both consumer and business confidence.

• Growth in the overall economy is projected to pick up modestly next year, even as global economic uncertainty lingers. This will depend on a careful balancing act: keeping inflation in check while also supporting jobs and spending.

• The unemployment rate may tick up but is expected to remain below 4.5%, underscoring continued resilience in the labor market. Wage growth, while still subdued, will be critical in shaping both spending power and future inflation trends.

• Starting from late 2025, Australia will switch its primary measure of inflation from quarterly to monthly CPI updates. This move will provide policymakers, investors, and the public with more timely insights into inflation trends and help inform faster responses if conditions change.

Conclusion

Australia stands at an inflection point: high inflation is receding, but not yet gone, and risks remain on the horizon. For households, businesses, and investors, staying attuned to shifting trends in prices, interest rates, and policy decisions will be key for making informed financial choices in the months ahead.