While headline inflation appears to have softened in the year to July 2026, KPMG chief economist Dr Brendan Rynne says sticky core inflation may put a dampener on the Reserve Bank of Australia ahead of its next monetary policy meeting.
The Australian Bureau of Statistics reported that the consumer price index (CPI) rose 3.5 per cent in the 12 months to July 2026, down from 3.8 per cent in the 12 months to June.
The largest contributor to annual inflation in July was housing, which rose by 5 per cent. The next largest contributors were food and non-alcoholic beverages, rising 3.2 per cent, and recreation and culture, which rose 2.6 per cent.
When prices for some items change significantly, such as automotive fuel, measures like the trimmed mean can give more insights into how underlying inflation is trending without the impact of temporary shocks.
Trimmed mean annual inflation remained steady at 3.6 per cent in the 12 months to July, unchanged from the 12 months to June 2026.
Dr Rynne said both headline and core inflation have come in at higher levels than market expectations, which are both above RBA’s target band of 2-3 per cent. He said this will give the RBA board continued cause of concern.
“The breadth of the high inflation appears to be nearly all pervasive across the economy, with only one area being transport recording annual inflation less than the RBA’s 2.5 per cent target rate,” Dr Rynne said.
“This, combined with the fact we are still yet to see any turn around in core inflation, continues to suggest that a further increase in the cash rate by a quarter of a per cent will be necessary to enable core inflation to return to the midpoint of the target band within a reasonable time frame.”
Dr Rynne warned that this new data supports the view that without policy action, Australia may be in for a long, costly grind to get inflation under control. “The Reserve Bank may have missed an opportunity at the last board meeting to get ahead of the game by raising rates.”
ABS head of price statistics Rachael McCririck said the surge the surge in housing rose 5 per cent due to rising costs for new dwellings.
“New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour,” she said.
Annual inflation for food and non-alcoholic beverages was 3.2 per cent in the 12 months to July. Food inflation was driven by higher prices for meals out and takeaway, which rose by 4.5 per cent in the 12 months to July 2026.
Annual inflation for transport was 1.6 per cent, up from 0.1 per cent in the 12 months to June 2026.
“On a monthly basis, automotive fuel prices rose 7.5 per cent in July after falling for three months in a row,” McCririck said. “This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July.”
Percentage-wise, clothing and footwear has posted the highest rise in inflation, with average prices rising 4.8 per cent in the year to July 2026 in seasonally adjusted terms. Education posted the second-highest lift in annual inflation, up 4.7 per cent.
Given the sizes of these industries relative to food and transport, the rises here would have had less of an impact on overall inflation.
Over the past 12 months, accessories led the inflation rise in the fashion category, with CPI in accessories growing 14.6 per cent. Garments for men lifted 4.2 per cent, with both these subcategories contributing the most to overall fashion inflation.