Inflation climbs to highest rate since July 2024, complicating September rate call

Headline inflation rose by 2.8 per cent in the year to July 2025, up from 1.9 per cent the month prior. This was the highest annual inflation rate recorded by the Australian Bureau of Statistics since July 2024.

Trimmed mean inflation, the less volatile measure preferred by the Reserve Bank, was 2.7 per cent in the year to July 2025. This was up from 2.1 per cent in the year to June 2025.

Josh Gilbert, market analyst at eToro, said that the surprisingly high inflation readings were a “setback” for those expecting continued easing.

“The data will be a setback for those expecting continued easing after the rate cut earlier this month. While the RBA has signalled more easing is likely, today’s figures reinforce the board’s cautious stance and reaffirms that fighting inflation is no easy task,” Gilbert said.

“Markets still expect another cut before year-end, but if we see more reports similar to this, that expectation will diminish. Let’s be clear though, this is just one print. The board prefers to focus on quarterly data, but there’s no doubt this will unsettle the board.”

The largest contributors to inflation were housing (+3.6 per cent), food and non-alcoholic beverages (+3 per cent) and alcohol and tobacco (+6.5 per cent), ABS data showed.

Housing inflation was underpinned by rising electricity costs, which grew by 13.1 per cent over the year to July as commonwealth energy rebates expired, the ABS noted.

Annual food inflation slowed in some categories, but remained stubbornly high in others as extreme weather events dampened crop yields overseas.

“While annual inflation eased for some food categories in July, coffee, tea and cocoa prices continued to rise, up 14.4 per cent in the past 12 months,” Michelle Marquardt, ABS head of prices statistics, said.

“This comes as supply has been affected by adverse weather conditions impacting major overseas coffee bean-growing areas.”

In its August statement on monetary policy, the Reserve Bank forecasted that annual trimmed mean inflation would plateau at 2.6 per cent from late 2025 to mid-2027. July’s trimmed mean inflation was only slightly above this forecast, at 2.7 per cent.

Headline inflation was a bigger surprise, rising by 2.8 per cent after consensus forecasts predicted a 2.3 per cent rise.

Some of the drivers of the July 2025 inflation uptick, such as the expiry of temporary electricity rebates, had already been on the RBA’s radar. The central bank’s August forecasts predicted that headline CPI would climb to 3.0 per cent in December 2025.

“Headline inflation was expected to increase temporarily over the second half of 2025 to around 3 per cent, before returning close to the midpoint of the target range over the latter part of the forecast period,” the RBA’s August meeting minutes read.

“This volatility reflected the legislated unwinding of electricity rebates, which would boost headline inflation over 2025 and 2026.”

The RBA board said that there were domestic inflation risks in both directions. The most “material” risks related to spare capacity in the labour market, the strength of the recovery in domestic demand and flow-on effects from global trade disruptions.

AMP economist My Bui said that while the July CPI data had been “quite strong,” there was no cause for concern yet.

“Services inflation is still the major driver of underlying inflation pressures in Australia – rising by 3.5% over the year as opposed to a 2.3% rise in goods,” Bui said.

“As a result, we are not overly concerned about a rebound in overall inflation ahead and continue to see the quarterly trimmed mean reading coming in within the target band between now and year end.”

However, Bui flagged that ‘CPI excluding volatile items and travel’ grew by 3.2 per cent in the year to July 2025, the first time it moved outside of the RBA target band in a year.

“The RBA is potentially a bit more concerned about recent upward momentum in consumer goods … given that the “core” measures also ticked up this month,” she said.

RBA meeting minutes indicated that there would likely be further interest rate cuts over the coming year, but the pace of easing would be influenced by evolving economic data and risks.

“Members agreed that – based on what they knew at the time of the meeting – preserving full employment while bringing inflation sustainably back to the midpoint of the target range appeared likely to require some further reduction in the cash rate over the coming year,” meeting minutes read.

“They also agreed that it was important for the pace of decline in the cash rate to be determined by the incoming data on a meeting-by-meeting basis.”

Arguments for a more gradual pace of easing included tight labour market conditions and RBA forecasts which projected that inflation would be marginally above the RBA’s 2.5 per cent inflation target over the medium term.

Private demand also showed signs of recovering, which would place less pressure on the RBA to cut interest rates rapidly.

Conversely, if the labour market turned out to already be in balance or downside risks grew due to global economic developments, the RBA noted it could embark on a more rapid easing cycle.

The RBA emphasised that it would take a gradual approach to interest rate cuts over the medium term, given significant uncertainties present in the global and domestic economies.

“Members agreed that it was not yet possible to judge between these alternative scenarios for the pace of future reduction in the cash rate, given the prevailing uncertainties,” meeting minutes read.

“In light of this, they emphasised the need to be attentive to the data and to be guided by how they shape the evolving assessment of risks.”