ISCOVER
Higher-than-expected underlying inflation will likely stay the hand of the RBA Monetary Board next month, according to economists.
The monthly consumer price index (CPI) rose 2.8 per cent in the 12 months to July 2025, up from 1.9 per cent in the year to June, according to the latest data from the Australian Bureau of Statistics (ABS).
The increase means this is the highest annual inflation rate since July 2024, following several months of price levels easing.
Annual trimmed mean inflation, or underlying inflation, was 2.7 per cent to July, up from 2.1 per cent to June.
Volatile and one‑off factors including the end of state energy rebates, travel prices and fuel were behind the increase. Some of the largest contributors to accelerating inflation were food and non-alcoholic beverages (3.0 per cent higher), and alcohol and tobacco (up 6.5 per cent).
Electricity costs soared 13.1 per cent in the 12 months to July, compared to a 6.3 per cent fall in the corresponding metric for June.
The CPI excluding volatile items and holiday travel measure rose 3.2 per cent in the 12 months to July, compared to a 2.5 per cent rise in the 12 months to June.
Annual housing inflation surged to 3.6 per cent in the 12 months to July, up from 1.6 per cent in the year to June, reflecting increases in electricity costs.
“Annual trimmed mean inflation was 2.7 per cent to July 2025. This was up from 2.1 per cent inflation to June and similar to the rate that we saw three months ago,” Michelle Marquardt, ABS head of prices statistics, said.
For new dwellings, prices rose 0.4 per cent in the 12 months to July, unchanged from the year to June. Annual growth remains low, reflecting a subdued new home market.
Rents rose 3.9 per cent in the 12 months to July, slowing from a 4.2 per cent rise in the year to June, marking the lowest annual growth in rental prices since November 2022, consistent with stable vacancy rates across most capital cities.
Inflation surge “should not be ignored”
The rise means underlying inflation is higher than the RBA’s 2–3 per cent target range midpoint and was higher than many bank economists expected, clarifying expectations that the Monetary Policy Board of the central bank will not reduce the official cash rate in September.
In its latest meeting minutes, the RBA’s Monetary Policy Board said it expected inflation to be “marginally above” the midpoint of the 2–3 per cent target band in the medium term.
Commenting on the latest inflation data, Westpac senior economist Justin Smirk flagged that the monthly CPI indicator exceeded both the bank’s estimate and the top of the market forecast.
“In our preview, we highlighted the high degree of uncertainty stemming from the combination of rising electricity bills and the unwinding of cost-of-living rebates, noting that risks to our estimate were skewed to the upside,” Smirk said.
“While it would be easy to attribute this entirely to the sharp rise in electricity prices, dismissing it as a one-off would overlook a potentially important shift in inflation dynamics,” he cautioned.
Smirk described the rise in underlying inflation as “a meaningful acceleration”.
“One month does not make a trend, but this move should not be ignored.”
Based on the July data, Westpac now sees upside risk to its September quarter CPI forecasts for headline and trimmed mean inflation.
“We expect the RBA will take a similar view and, as such, is unlikely to cut rates in September. Instead, the bank will likely wait for the full September quarter CPI results, due in the last week of October.”
However, Harry Ottley, an economist at the Commonwealth Bank of Australia (CBA), said that given the volatility in monthly inflation figures, the RBA board is unlikely to be overly concerned about the surprisingly strong print.
“It does, however, further support the view that the RBA is firmly in a cautious and data‑dependant mode. The implied preference for a quarterly cadence of cuts will remain for now, making November the next likely 25bp cut to 3.35 per cent,” he added.
ANZ senior economist Adelaide Timbrell noted that drivers for the spike in monthly inflation “were mostly more volatile items as well as electricity”.
She flagged that the major expects the jump in holiday travel and accommodation prices to fade quickly.
Timbrell added that the central bank will be sensitive to changes in inflation, noting that the RBA’s August Statement of Monetary Policy included liaison commentary on consumers that “price-sensitivity remains a recurrent theme”.
Over at National Australia Bank (NAB), senior markets economist Taylor Nugent said the monthly data had limits in its usefulness, describing the annual trimmed mean as a “different, less informative concept” than the quarterly trimmed mean.
“The key point is that the surprise, while large, was driven by the timing of subsidy payments and the volatile travel component.
“It will tell the RBA little about the underlying pulse of inflation and comes after a period where the monthly CPI indicator had been understating the strength of inflation on both the trimmed mean and headline measures.”
[Related: RBA hints at more rate cuts this year]
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