Inflation edged up to 3.0% in August – its highest in a year – but the Reserve Bank held the cash rate at 3.60%, signalling caution on further cuts. While the headline figure isn’t ideal, it was broadly in line with expectations and does not yet shift the underlying trend. The Board’s decision reflected a slower pace of progress on underlying inflation and signs of stronger private demand.
From easing to pressure
The headline result has been skewed by a “base effect”, meaning last August’s unusually low result makes today’s figure look higher than it otherwise would. Without that distortion, the August print would be closer to trend.
Alongside Housing, the ABS flagged Food & non-alcoholic beverages (+3.0%) and Alcohol & tobacco (+6.0%) as key contributors to the annual rise.
Housing and electricity
Housing was the largest contributor to August’s rise, with costs up 4.5% annually. Electricity prices distorted the data, rising 24.6% over the year as temporary state rebates expired. The ABS highlighted concentration in Queensland, Western Australia and Tasmania – states where rebates had been most generous – reinforcing how policy shifts can skew inflation readings.
In monthly terms, electricity fell 6.3% as new Commonwealth rebates were applied in NSW and the ACT. Excluding rebate effects, electricity was up just 5.9% over the year. From my perspective, this highlights why energy is one of the most difficult categories to interpret – rebates and subsidies can mask the true cost households are facing.
Rents rose 3.7% over the year, their slowest pace since late 2022, while new dwelling prices increased 0.7% annually as builders pulled back on discounts.
The ABS also revised July’s electricity series higher (to +13.6% y/y), reflecting changes to state concessions.
Food and dining
Food inflation held steady at 3.0%. Meat and seafood prices rose strongly, while fruit and vegetables eased. Dining out was also costlier, with takeaway prices up 3.3% – the strongest annual rise in a year. The result is a mixed picture: protein prices are climbing, fresh produce is easing, and dining out continues to get more expensive – a reminder that labour and service costs are proving harder to contain than food production costs.
These divergences remind us why food is such a volatile driver of the CPI, with households feeling the pinch most acutely in their weekly shop and in discretionary dining.
Travel, fuel and insurance
Other categories showed signs of easing. Holiday travel and accommodation rose just 1.1% annually, down from 3.3% in July, and fell 3.5% in the month as demand dropped after the school holidays.
Fuel prices remain 1.7% below last year, but climbed 0.8% in August. Insurance rose 2.6% annually – the smallest annual increase in more than four years – but premiums were still up 1.6% for the month.
Together, these smaller categories highlight why headline inflation can look patchy month-to-month, even as the underlying trend continues to soften.
Underlying inflation
For monetary policy, the focus is on underlying inflation. The trimmed mean – which strips out the most extreme price moves and therefore excluded this month’s electricity spike – eased to 2.6% in August from 2.7% in July. On another measure, excluding volatile items such as fuel, fruit and holiday travel, inflation rose 3.4%, compared with 3.2% the month prior.
The RBA prefers the trimmed mean because it smooths out one-off shocks, giving a clearer picture of the underlying trend. This is the measure that ultimately drives cash rate decisions. To me, it shows inflationary pressures are still edging lower, but progress is uneven.
Why the RBA held steady
The RBA’s decision to hold at 3.60% was a clear signal: progress on inflation has slowed, and the risks of cutting too soon remain high. The Bank warned Q3 inflation may come in higher than expected, with stronger household demand, a firming housing market and a still-tight labour market all adding to risks.
The Bank also noted the unemployment rate held at 4.2% in August as private consumption picked up with rising real incomes.
It also pointed to global uncertainty, with ongoing trade policy shifts and broader geopolitical risks posing potential threats to growth. With financial conditions already easing due to earlier rate cuts, the Board judged it was appropriate to pause, while reaffirming it is “well placed to respond decisively” if global developments materially affect inflation and activity. In other words, the Bank wants more evidence before committing to the next step.
Market reaction
Markets had already pushed back expectations for cuts following the August CPI. September cuts were quickly ruled out, with November seen as a coin toss. Some analysts have gone further, warning that cuts may not come until 2026. This divergence underscores how sensitive expectations remain to each monthly release.
The Australian dollar firmed to 0.66 USD after the CPI figures, reflecting expectations that monetary policy will stay tighter for longer. That supports the currency but makes exports less competitive – another balancing act for the RBA.
Government vs markets
Treasurer Jim Chalmers has emphasised that underlying inflation has been within the RBA’s target range for nine consecutive months, calling it “substantial and sustained progress”. He pointed to this stability as giving the RBA confidence to cut rates three times in six months, and highlighted that both headline and underlying inflation are at their lowest levels in almost four years.
Markets, however, take a different view. They see the monthly CPI as volatile and, with the RBA striking a cautious tone in its September statement, many believe the risks of overshooting remain. This gap between political messaging and market caution is why businesses need to plan using the underlying trend, not the headlines.
Looking ahead
Inflation’s “last mile” is proving difficult, with rebates and seasonal effects obscuring the trend. That’s why the RBA remains focused on trimmed mean inflation. From November, the ABS will transition to a complete monthly CPI, which should provide more timely insights than the quarterly index. This will sharpen the debate, but it won’t make the RBA’s task of steering inflation back to target any easier.
My Take
For businesses and households, the message is clear: don’t anchor decisions to the headline figure alone. The underlying measures show inflation pressures are easing, but the pace is uneven, and the RBA has made it clear it will not rush further cuts.
Planning for a longer period of tight financial conditions remains the prudent course – but those who stay focused on the core trend, rather than the noise, will be best placed to not just weather the conditions, but position themselves ahead of the turn when monetary policy eventually eases.
