Getting to the bottom of inflation in Australia — and it’s not a problem

A closer look at the data suggests Australia’s recent inflation scare is more of a statistical glitch than an economic downturn, and the RBA risks reading it wrong. Stephen Koukoulas reports.

AT THE LATE OF LAST YEAR Australia’s inflation rate rose unexpectedly.

After exactly one year quarterly inflation while the September quarter consumer price index rose 1.3% and the adjusted mean measure rose 1%.

Both were significantly higher than the Central Bank (RBA) and almost every economist expected it.

The forecast error was so great that expectations for future interest rate settings swayed wildly. A rate cut was no longer expected, but rate hikes were being discussed and “priced in” according to money market futures.

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

This comment from the RBA was suspect to some economists and, as more recent data begin to show, it looks like an overreaction to an interesting inflation outcome.

The latest data on inflation shows that the rapid rise 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, it began to disappear from the data.

While more data is needed to be sure this is a statistical oddity, it’s becoming more and more likely that eggs have been laid on RBA’s face.

This is important for the discussion on the outlook for interest rate adjustments to 2026.

Of course, if the increase in inflation in the September quarter was the result of fundamental excesses in demand, then interest rates would also have to rise. This is very clear. This was the interpretation of the RBA and many other economists’ data.

But as is often the case with data, oddities and anomalies occasionally arise, especially when compiled through a series of surveys such as those used to compile CPI data.

run monthly inflation Developments in the last seven months are 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 consider in this time series.

Perhaps the most obvious is the 1.3% inflation rate in July, which directly affected the September quarter result. Inflation was at an average of 0% in the two months before and the four months after this result.

This is remarkable.

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

July is the start of the new fiscal year, and many government-run prices are adjusted (increased) starting July 1.

Here are some examples from July that are clearly unrelated to monetary policy:

tobacco and alcohol: +1.3% (excise duty increase);
electricity: +13.5% (phasing out cost-of-living reductions);
urban transport fares: +1.8% (end of some public transport subsidies); And
postal services: +1.1% (rising postal costs).

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

This checklist includes: Very strong growth of the economy, a tight labor market associated with low and falling unemployment, and high and rising wage growth.

None of this is in the game.

In fact, the opposite is true.

While GDP growth will recover somewhat by 2025, annual growth has been at or below 2.2% for two and a half years, averaging a meager 1.5% over that period. This is a long period of economic underperformance and runs counter to the narrative of accelerating inflation.

It takes a little statistical distortions portraying this as economic strength consistent with high inflation.

At the same time, the unemployment rate is rising rather than falling.

from a low of 3.4% in October 2022 unemployment rate It tended to rise to 4.3% in November 2025. Data on open job positions show that this rate will increase further in the coming months.

As a result (that’s how the economy works) wage growth slowed significantly last year.

annual increase wage price index It peaked at 4.3% in the December 2023 quarter and fell to 3.4% in the September 2025 quarter as the labor market began to soften. This pace of wage growth is fully consistent with the RBA inflation target.

Not more, not less.

This brings us back to the inflation rate.

The rise in inflation in the September quarter was probably an outlier, an odd result, a point brought into focus by the October and November monthly data, which each showed zero inflation.

It would be wise for the RBA to delay a rate hike in February, as some market economists have predicted. An increase that would be surprised by the sharp decline 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, the former chief economist of Citibank and the Prime Minister’s senior economic adviser. You can follow him on Twitter/X @TheKouk.

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