Australia’s inflation hits 3.8 per cent as RBA faces pressure over next interest rate decision
Inflation moderated to 3.8 per cent in the year to June but this covered the period before fuel tax relief was tapered, meaning borrowers could still face another hike.
Australia’s inflation pace moderated to pre-Iran war levels before petrol tax relief tapered off, but it may be insufficient to stop another interest rate rise.
The consumer price index grew by 3.8 per cent in the year to June, down from 4 per cent in May, to be at the weakest level since February before the US strikes on Iran led to a blockade in the Strait of Hormuz that pushed up crude oil prices.
But the annual pace of headline inflation has now been above the Reserve Bank of Australia’s 2-3 per cent target for the 11th straight month.
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By continuing you agree to our Terms and Privacy Policy.The RBA’s preferred underlying measure of inflation without volatile price items was still also high at 3.6 per cent.
This meant an August rate hike was still a possibility, which would take the RBA cash rate to a 15-year high of 4.6 per cent, despite market pricing falling for an increase next month, KPMG chief economist Brendan Rynne said.
“Core inflation remains stubborn and well above the RBA’s target band,” he said.
“The RBA is between a rock and a hard place. The economy is not in great shape and uncertainty driven by global and domestic factors is elevated yet it seems inevitable that further rate rises may be necessary to bring inflation back inside the RBA’s target range within a reasonable time frame.”
Deloitte Access Economics partner Stephen Smith said a 2026 rate hike was still a possibility, even if it didn’t occur in August.
“In other words, falling oil prices and the government’s temporary fuel excise cuts took the heat out of the price of imported goods,” he said.
“But price pressures in the service economy that are not necessarily linked to the Middle East conflict picked up, suggesting that home-grown inflationary pressures are yet to be tamed.”
Housing costs climbed by 6.8 per cent during the last financial year ahead of education on 4.8 per cent as overall services inflation went up by 4 per cent.
Goods inflation increased by a more moderate 3.5 per cent but clothing and footwear costs rose by 4.9 per cent.
The Australian Bureau of Statistics data was taken in June before the Federal Government’s fuel tax relief was halved from 32 cents a litre to 16 cents a litre in July and extended until August 2.
As a result, automotive fuel prices fell 7.3 per cent with average unleaded prices at just $1.51 a litre at the end of June compared with $1.73 for diesel, based on Australian Competition and Consumer Commission price monitoring data.
The data was released on Wednesday, a day after Reserve Bank of Australia governor Michele Bullock hinted another rate rise may be needed as weak productivity growth added to inflationary pressures.
But Treasurer Jim Chalmers noted the 3.8 per cent CPI was much lower than Reserve Bank forecasts of 4.8 per cent for June 2026 and Treasury Budget predictions of 5 per cent.
“This means that inflation has come in lower than expected, lower than forecast in the Budget or by the Reserve Bank,” he said.
“This is the third consecutive month where annual headline inflation has moderated.
“It’s an encouraging outcome that shows we’ve made progress on inflation since the Budget, even in the face of intense global uncertainty.”
