Australian inflation remains persistent as the RBA tightens policy
Underlying inflation in Australia has stayed around 3.5% while other major economies have fallen to 2–2.5%, prompting the Reserve Bank of Australia to raise rates more frequently.
Underlying inflation in Australia has stayed near 3.5-3.6% through late 2025 and 2026, higher than the 2-2.5% range recorded in the United States, the United Kingdom and Canada, according to official CPI data. The higher rate has led the Reserve Bank of Australia (RBA) to increase the cash rate five times this year, compared with a single hike in the US and the UK over the past two years.
Economists cited several factors behind the stickier price pressures. After the pandemic, strong consumer demand initially drove inflation, but more recent increases are linked to supply constraints such as a shortage of housing, higher energy costs from global oil price spikes, and labour shortages that raise production costs. Investment in data centres and digital infrastructure has also boosted demand for construction materials, electricity and skilled workers, adding short-term pressure on prices.
The RBA’s primary tool, the cash rate, curtails spending by making borrowing more expensive, which is effective when demand fuels inflation. However, analysts note that rate hikes cannot directly address shortages in housing, energy or skilled labour, nor can they resolve geopolitical tensions that affect fuel prices. Research from the International Monetary Fund and the European Central Bank warns that overly aggressive tightening in the face of supply-driven inflation could suppress growth and raise unemployment.
Because most Australian mortgages are variable-rate, rate increases quickly raise household repayments, intensifying the impact on borrowers. Experts suggest that, alongside monetary policy, the federal and state governments should focus on expanding supply by building more housing, investing in energy infrastructure, improving workforce skills, encouraging broader workforce participation, reducing barriers to business investment and pursuing regulatory reforms that boost productivity.
The RBA’s latest rate rise also pushed its inflation-target forecast out to late 2027, indicating that achieving the 2-3% band will likely require both monetary actions and broader supply-side reforms.