Australia's June quarter CPI report came in softer than expected, dramatically reducing market expectations of an interest rate hike in the near term. Headline annual inflation fell to 3.8% from 4.0% in May, while the RBA's preferred measure of underlying inflation, the trimmed mean, was 3.6%, below both market expectations and the RBA's May Statement on Monetary Policy forecasts.
The moderation in inflation was largely driven by lower fuel prices following the easing in global oil markets during the quarter, although domestic inflation pressures remain evident. Housing continued to be the largest contributor to annual inflation (+6.8%), reflecting persistent increases in new dwelling costs and rents, while services inflation remains elevated, highlighting that labour-intensive sectors continue to experience cost pressures. Food and recreation prices also remained meaningful contributors, demonstrating that inflation is becoming increasingly concentrated in domestically driven components of the basket rather than imported goods.
From a monetary policy perspective, the softer-than-expected inflation outcome has materially shifted market pricing. Money markets have now all but ruled out the prospect of an August RBA rate hike and have pared expectations for further tightening to around a 40% probability of one additional increase by Christmas, down from approximately 80% following last week's stronger-than-expected labour force data.
That said, it would be premature to conclude that the tightening cycle has ended. While some economists have begun suggesting that interest rate cuts could arrive sooner than previously anticipated, Australia's domestic inflation challenge remains unresolved. Services and housing-related price pressures continue to run well above levels consistent with the RBA's inflation target, reinforcing Governor Bullock's comments earlier this week that underlying domestic inflation remains the key concern for the Board. As such, barring a more pronounced deterioration in economic activity, policy easing still appears some way off.
Looking ahead, geopolitical uncertainty remains a risk to the inflation outlook, with any escalation capable of disrupting global supply chains and reigniting price pressures. In the absence of such a shock, today’s CPI release supports an extended period of policy stability while the RBA assesses whether domestic inflationary pressures moderate, to allow underlying inflation to return sustainably to its 2-3% target range.
Source: Consumer Price Index, Australia, June 2026.