Australia inflation runs hot in July, adding to rate hike risk

Data released on Aug 26 revealed Australian consumer prices increased more than anticipated in July, with fuel and travel costs surging, according to the Australian Bureau of Statistics. On Aug 26, the Australian dollar climbed 0.2 percent to US$0.7176, as three-year government bond futures fell slightly to 95.42 from an earlier high.

Forecasts had been adjusted upward, with the possibility of a fourth rate hike by the Reserve Bank of Australia in September rising to 36 percent from 17 percent, with a February 2027 hike now seen as likely at 94 percent.

The monthly consumer price index (CPI) for July rose 1.0 percent from June, surpassing expectations of a 0.8 percent increase. Fuel prices jumped 7.5 percent following a three-month decline, while the annual rate of inflation slowed to 3.5 percent from 3.8 percent, below expectations for a sharper deceleration to 3.3 percent due to an outsized drop out of 2025.

Core inflation, excluding volatile food and energy prices, increased by 0.5 percent in August, the highest annual rise in a year and well above expectations of 0.3 percent, with the annual rate standing at 3.6 percent.

The RBA maintained interest rates at 4.35 percent for the second consecutive meeting in August, following three hikes aimed at curbing inflation in 2026. Central bank minutes released on Aug 25 indicated several board members believed upside inflation risks could materialize, necessitating additional tightening measures. The report suggested higher dwelling prices rose 5.7 percent in July, slowing from a 5.8 percent gain the previous month, as builders passed on increased material and labor costs.

Rent inflation remained high at 3.6 percent, while tradeable goods prices surged 1.5 percent driven by fuel cost increases, up from a 0.8 percent decline the prior month. Deutsche Bank economist Phil Odonaghoe stated that the July CPI leaves little room for the RBA to avoid further rate hikes and sooner would be better.