Getting to the bottom of inflation in Australia

A closer look at the data suggests Australia’s recent inflation scare was less an economic relapse than a statistical hiccup — and one the RBA risks misreading at its peril. Stephen Koukoulas reports.

LATE LAST YEAR, Australia’s inflation rate unexpectedly jumped.

After a full year where quarterly inflation averaged 0.5% and the trimmed mean measure averaged 0.7%, the September quarter consumer price index jumped 1.3% with the trimmed mean measure lifting 1%.

Both were materially higher than the Reserve Bank (RBA) and just about every economist was expecting.

Such was the extent of the forecasting error that expectations for future interest rate settings swung wildly. No longer were interest rate cuts expected, but rate hikes were being canvassed and “priced in” to money market futures.

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There was a time when the word “inflation” was little more than an abstract economic term that was mentioned on the news every once in a while. However, it is now very much a daily concern for millions of Australians.

The RBA interpreted the data as a turning point in what had been a two and a half year decline in inflation.

This interpretation from the RBA was, to some economists, questionable and as the more up-to-date data are starting to show, it looks like an over-reaction to what was a quirky inflation result.

The recent data on inflation shows that the blip up in inflation in the September quarter was a coincidence of events unrelated to interest rates and the strength of the economy, and as a result, they are starting to wash out of the data.

While more data are needed to be sure that it was a statistical quirk, there is a growing probability that the RBA will be left with egg on its face.

This is important for the discussion on the outlook for interest rate settings into 2026.

To be sure, if the inflation lift in the September quarter was the result of fundamental excesses in demand, then interest rates would need to increase. That is obvious. This has been the interpretation of the data from the RBA and many other economists.

But if, as is often the case with data, particularly when it is collated by a series of surveys like those used to compile CPI data, quirks and anomalies show up from time to time.

The run of monthly inflation over the past seven months has been as follows:

May: -0.5%;
June: 0.1%;
July: 1.3%;
August: -0.1%;
September: 0.5%;
October: 0%; and
November: 0%.

There are several vital issues to note with this time series.

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Perhaps most obvious is the July 1.3% inflation rate that fed directly into the September quarter result. In the two months prior and four months after that result, inflation has averaged 0%.

This is noteworthy.

What happened in July to trigger such a sharp lift in prices?

July is the start of the new financial year and many government-administered prices are adjusted (increased) from 1 July.

Some examples from July that are clearly unrelated to monetary policy are:

tobacco and alcohol: +1.3% (excise increase);
electricity: +13.5% (the phasing out of cost of living rebates);
urban transport fares: +1.8% (the ending of some public transport subsidies); and
postal services: +1.1% (rising postage costs).

When it happens, high and accelerating inflation, in terms of the monetary policy implications, is clearly and obviously linked to key fundamental factors.

Included in this checklist are: the economy growing too strongly, a tight labour market linked to low and falling unemployment and high and rising wage growth.

None of these is in play.

Indeed, the opposite is true.

While GDP growth has recovered somewhat through 2025, annual growth has been at or below 2.2% for two and a half years, averaging a weak 1.5% over that time. This is a long period of economic underperformance and goes against the inflation acceleration narrative.

It takes some statistical contortions to paint this as economic strength consistent with higher inflation.

Full employment under threat as labour market weakens

Australia’s labour market is softening, with rising unemployment and sluggish job creation putting full employment at risk.

At the same time, the unemployment rate is rising, not falling.

From a low of 3.4% in October 2022, the unemployment rate has trended up to 4.3% in November 2025. The data on job vacancies suggests it will rise further in the months ahead.

As a result – and this is how an economy works – wage growth has slowed markedly over the past year.

The annual increase in the wage price index peaked at 4.3% in the December quarter 2023 and as the labour market started to soften, it eased to 3.4% in the September quarter 2025. This pace of wage growth is entirely consistent with the RBA inflation target.

No more, no less.

Which brings us back to the inflation rate.

The September quarter jump in inflation was likely an outlier, a quirk, a rogue result, a point brought into focus by the October and November monthly data, which have each shown zero inflation.

For the RBA, it would be wise to hold off on increasing interest rates in February, as some market economists are now forecasting. To hike then only to be flummoxed by a sharp drop in inflation in the March and June quarters would be costly for economic growth, employment and confidence.

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past chief economist of Citibank and Senior economic advisor to the Prime Minister. You can follow him on Twitter/X @TheKouk.