“Real wages are growing at their strongest rate in five years, inflation has a two in front of it and interest rates have been cut three times in the last six months.”
It was just last month that Jim Chalmers kicked off his economic reform round table with that familiar spiel, ticking off the economy’s happy progress over recent years.
Just five weeks later, one of those things is no longer true: inflation now has a three in front of it. ABS figures released on Wednesday showed consumer price growth accelerated to 3% in the year to August, extending a swift rise from 1.9% in June.
That’s at the top of the Reserve Bank of Australia’s (RBA) 2% to 3% target range, and moving in the wrong direction after charting a steady path lower since the peaks of 2022.
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Nobody wanted to say “mission accomplished” on inflation – certainly not Chalmers. But he, like most of us, was surely thinking it.
But how worried should we be? Is the inflation dragon stirring again, just as the green shoots are starting to emerge from the scorched earth it left behind?
There are reasons to relax. The “headline” inflation figure is being buffeted by one-offs – not least the surge in power prices compared to a year ago as electricity bill subsidies expire.
The monthly inflation numbers also offer only a partial picture.
The RBA’s chief economist, Sarah Hunter, told a parliamentary committee on Monday that the monthly consumer price figures were unreliable and that the central bank had expected the end of electricity subsidies would push the headline number back to 3% in early 2026.
Economists, however, have been shaken by this week’s data. Barrenjoey’s head of economic forecasting, Johnathan McMenamin, reckons Wednesday’s release represents “one of the worst-case scenarios for the inflation data”.
Like other analysts, McMenamin points to persistently strong price increases in services, like hairdressing, eating out, takeaway and household services.
Construction costs are also coming back, and rent inflation has stopped slowing.
“This inflation bumpiness tells us maybe the speed limit of the economy is lower than we thought,” McMenamin says – by which he means it doesn’t take much of a lift in activity to stir up inflation again.
To be clear: nobody is talking about a rate hike. More persistent inflation means that instead of a rate cut in November, we may not get a reduction until closer to mid-2026.
“We’ve really pushed out the expectation for rate cuts until later in the first half of next year, potentially in May,” McMenamin says.
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If the RBA feels it needs to sit tight, rather than cut, then that will remove a tailwind for the economy and could dent our willingness to spend.
“It could challenge the consumer bounce-back, it may challenge people’s confidence, and it will probably challenge the rebound in house price momentum.”
Jonathan Kearns, the chief economist at Challenger and a former senior RBA official, says it is striking how many analysts have flipped their rate calls and now predict the RBA to stay on hold until 2026.
Not only have economists delayed the next RBA cut, they also think rates won’t fall as far.
“Clearly, inflation is a little bit stronger than we were expecting; it is a bit more persistent. It indicates the RBA is going to be very cautious, and it may not cut on a quarterly cycle,” Kearns says.
The next key test will be the inflation report for the September quarter, which doesn’t drop until 29 October.
The RBA’s monetary policy board meets on Monday, and its governor, Michele Bullock, will front the media on Tuesday afternoon.
Nobody expects a rate cut next week, but economists, journalists, politicians and everyday Australians will be listening carefully for what the central bank boss thinks will happen next.
