Australian Inflation Rate: Will It Drop To 2.5% In 2025?

Reading Time: 14 minutes

Many Aussies did a double-take when the Reserve Bank of Australia (RBA) decided to leave interest rates on hold at its 8th July meeting.

But few were surprised when the bank delivered another cut in August.

Inflation’s downward momentum means that the rate is now the lowest it’s been since mid-2023.

The key data points driving the latest decisions are:

Is an easing cycle finally underway?

The markets are optimistic, predicting another 25 basis point cut by Christmas 2025. But the pace of easing will likely ease after that.

Key Takeaways:
Inflation has fallen with the headline CPI at 2.1% and trimmed mean at 2.7%, but households are still having to spend more on essentials.
Rents and services like healthcare and education are still hitting hip pockets hard, reflecting domestic price pressures.
Australia’s inflation and rate-cutting cycles have lagged major economies like the US, but our progress isn’t out of step with global counterparts.

Will 2025 Bring More Inflation Relief?

On the one hand, the effect of 13 interest rate rises from the RBA across 2022-23 seems to be finally reducing price pressures.

On the other hand, President Trump’s extraordinary tariffs have led to financial market mayhem and retaliatory moves.

The longer-term effects on supply chains and inflation aren’t fully understood.

Above: Australia’s pace of disinflation has stalled. It’s the slowest disinflation cycle in the modern monetary policy era (post-1990). 

It acknowledges that a range of unpredictable domestic and international factors could see disinflation progress stall, or a sharper deterioration than expected.

Plus, cost of living pressures remain high.

But what do leading economists say about the odds of inflation rising again or declining further in 2025?

Is Australia Finally Turning the Corner On Inflation?

The June 2025 CPI print revealed that trimmed mean inflation – the Reserve Bank’s preferred measure – slowed to 2.7%, the lowest it’s been since December 2021.

While Aussies are paying less for the basics, they’re still paying too much.

Spending on non-discretionary items is still outpacing our ability to splurge.

Rent increases have eased from the extremes seen in recent years, but low vacancy rates mean rental prices keep climbing.

According to Louis Christopher, managing director of SQM Research, it’s still a landlord’s market:

Above: Inflation in services is still high, but eased to 3.3% (compared to 4.3% in December 2024) – thanks to lower rents and insurance.

Doing your weekly grocery shop is still painful on the hip pocket.

Fruit and veg prices continue to escalate, with a 4.6% increase compared to 12 months ago. 

Michelle Marquardt, ABS head of prices statistics said:

Significant price increases in the 12 months to June 2025 were:

Electricity prices rose since last quarter (up 8.1%) but fell over the 12 months since last June by 6.2%, with costs offset by additional federal government energy bill subsidies.

(Related: How Is The Australian Economy Doing?)

While housing, food and services inflation is still problematic, June’s CPI result has primed the market to expect an interest rate cut in August.

In particular, underlying inflation slowing to 2.7% should have helped address the RBA’s stated concern about whether “inflation remains on track to reach 2.5 per cent on a sustainable basis”.

But more cuts in the short term aren’t guaranteed.

Associate Professor, School of Economics, University of Sydney, Stella Huangfu, said inflation was still above forecast.

This could convince the RBA to hold out until the September quarter CPI data emerges.

However, RBA deputy governor Andrew Hauser described the June CPI result as “very welcome” and hinted at a return to more predictable policy decisions in line with market expectations.

Chief Economist at IFM Investors, Alex Joiner, said the higher-than-expected retail sales in June showed spending as strong as it has been for 10 years on a 6-month annualised basis.

Joiner also noted that while inflation is within target range, Aussies will still experience “sticker shock” — because higher average price levels will persist for some time.

Above: Retail sales on a 6-month annualised basis show consumer spending could be returning to strength.

Is The Australian Economy Doing Worse Than The US?

Australia’s inflation and rate-cutting cycle was lagging behind those of other major economies in 2024, particularly the US.

But with Trump’s chaotic return to power, the US Federal Reserve is taking a ‘wait and see’ approach.

Stock markets fell sharply after President Donald Trump’s  ‘Liberation Day’ announcement in April, in which he applied a universal 10% tariff on all imported goods and higher rates on countries such as China.

Dire inflationary effects from the tariffs now appear less likely, but Fed Chair Jerome Powell cautioned it was still “early days” and there were “many uncertainties left to resolve.”

In its May forecast, the RBA highlighted that:

 Above: Australia's rate hikes were comparatively less aggressive.

Australian inflation is projected to remain sustainably around the middle of the target range, with only a slight loosening of the labour market and weakening of domestic growth.

But amid what the RBA calls “heightened global uncertainty”, there remains a risk the economy will slow down too much.

The US Federal Reserve lifted its cash rate higher in a shorter time span.

And after some shaky unemployment data emerged, started easing sooner.

The Fed announced a 50 basis point cut to US rates at its September 2024 meeting, putting its benchmark rate at 4.75%-5.0%.

An additional 0.25% cut came in November, and another 0.25% in December 2024.

The Fed said in July that while the US labour market looks “solid”, inflation remains somewhat elevated.

The US CPI was negative in March 2025, but started inching higher again: 0.2% in April, 0.1 in May and 0.3 in June. That brought the annual rise to 2.7%.

It remains to be seen how well the US’s soft landing sticks with President Donald Trump inciting high levels of volatility as he enacts his policies, tariff threats and various schemes.

What Is The Australian Government's Forecast?

In its 2025-26 Budget, Treasury forecast that inflation would hit the middle of the target range (2.5%) by the June quarter.

The RBA’s forecast was more on-the-money. It predicted headline inflation of 2.1% by mid-2025 and a trimmed mean of 2.6%.

Further out, the RBA’s outlook (from May) sees:

Above: The forecast is based on the cash rate implied by market pricing - which had indicated a further 50bp of cuts were in the pipeline.

Wages growth that lifts demand, offset by supply-side constraints from the costs of paying staff, could combine to keep core inflation just above the midpoint of the 2-3% range.

However, that assumption was based on the RBA’s view that household spending would increase. In its decision to leave rates unchanged in July, the board said:

A floundering economy with deeper job losses would make more extensive interest rate easing a necessity.

For now, major banks believe the RBA will deliver at least one more 25 basis point cut to the cash rate in the remainder of 2025.

The Q3 CPI data won’t arrive until 29th October, making November the next likely timeframe for further easing.

Above: An unwinding of cost-of-living subsidies will see a pick-up in headline inflation, before it falls again (dashed line shows previous forecast from February).

Predictions for the consumer price index headline rate in 2025 from the banks include:

Bank	2025 Q3	2025 Q4
Westpac	3.0% annual change 2.6% trimmed mean	3.4% annual change 2.6 trimmed mean
NAB	3.0% annual change 2.8 trimmed mean	3.0% annual change 2.7% trimmed mean
ING	2.4% annual change	2.8% annual change

What Factors Cause Inflation To Persist?

You can look at the Australian economy in one of two ways:

Both are important. But in times of stress, humans overestimate the impact of the former and overlook the indirect (yet powerful) impacts of the latter.

The following micro and macro issues could have an impact in 2025:

1. Geopolitical Turmoil.

Further slowing of growth in the Chinese economy and ongoing conflicts in Russia/Ukraine and the Middle East are of concern.

The Israel-Hamas war rages on and it's unclear whether another ceasefire will be brought to bear.

Tensions with Lebanon, Iran and Houthi rebels that have been attacking ships in the Red Sea could all escalate once more.

The lingering threat continues to disrupt shipping to the detriment of supply chains.

In addition to supply disruptions, oil-producing countries - such as OPEC members and Russia - can have an outsized influence on the economies of rivals by manipulating the price of crude oil exports through reduced production.

Chief economist at investment firm TCorp, Brian Redican said in June:

2. Rising Employment And Wages.

With inflation getting under control, employment levels will come into greater focus for the RBA.

RBA Governor Michele Bullock said the rise was in line with its forecast and that unemployment was still low relative to history.

Employment has been resilient.

The Fair Work Commission announced a 3.50% increase to minimum and award wages that took effect from 1 July - in an effort to reverse the decline in real wages due to inflation.

The Wage Price Index rose by 3.4% annually based on data from the March 2025 quarter.

3. Government Spending. 

Fiscal policies impact how consumers and businesses make financial decisions.

This is why major government infrastructure projects, investments, subsidies and stimulus come under close scrutiny.

The Albanese Government’s budget for 2025-26 included more measures aimed at reducing inflation.

Among them are new tax cuts for workers earning between $18,201 and $45,000; increasing Medicare levy thresholds; more energy bill rebates; and cheaper medicines.

Temporary inflation-busters from the last budget will soon unwind.

It’s largely why the RBA’s forecasts show a spike in headline inflation in late 2025 (before easing again into 2026).

4. High Migration Levels. 

Albanese’s government faced heat after Australia’s migration boom dwarfed treasury forecasts, with a net gain of over 500,000 people in 2022-23, according to ABS stats.

In 2023-24, net overseas migration was 446,000.

Australia’s rental market is still tight, resulting in rental price inflation rising 4.5% annually, according to the latest CPI numbers.

Above: Some of the most significant price rises occurred in the rental market.

What Is The History Of Inflation Rates In Australia?

Australia saw several spikes in the inflation rate in the 70s, 80s and 90s.

The RBA adopted the 2-3% inflation target in the early 1990s, with cash rate changes as the primary tool to stimulate or dampen economic activity and keep inflation stable.

Pent-up demand from that period was cited as a major cause of skyrocketing inflation as pandemic restrictions eased.

Australia’s inflation rate hit a 22-year peak in December 2022, reaching 7.8%.

Above: Consumer price index averages can obscure price movements in different parts of the economy. Services and rent inflation is still high, while goods (including food) inflation is falling.

How Does Australia’s CPI Compare Globally?

Australia’s inflation rate had been one of the worst among advanced economies in 2023-24.

And there was evidence that inflation was easing more quickly elsewhere.

In the UK, inflation fell back to 2% for the first time in nearly three years in May 2024.

But it started rising again in late 2024, and in June 2025 the UK’s CPI was 3.6% — the highest it’s been since January 2024.

Above: The Economist coined a measure of “inflation entrenchment", a statistic used to demonstrate the stickiness of inflation. Australia was leading the pack in early 2024, likely due to some of the most generous pandemic stimulus measures.

In its economic outlook published in June, the OECD said that global growth was softening due to trade barriers, weak confidence and more uncertainty.

OECD-wide inflation is now projected to be slightly higher than previously anticipated (4.2%, up from 3.7% estimated in December). 

Above: Argentina, India, Indonesia and China are the projected GDP powerhouses.

The OECD said central banks should remain vigilant, but continue moderating policy rates:

Frequently Asked Questions About Australian Inflation Rate.

If you find macro and microeconomic concepts difficult to wrap your head around, you're not alone. Get up to speed with my definitions below.

Headline Consumer Price Index vs Underlying CPI: What's The Difference?

Headline and underlying CPI are two different ways to interpret the price change data collected by the ABS.

Another way CPI is analysed is the ‘Seasonally adjusted’ figure that accounts for regular seasonal price movements, such as an increase in the price of education in March each year.

The measure spreads out the impact of ‘seasonal’ pricing over the year.

Inflation is currently slightly higher based on the Trimmed mean, at 2.7%.

Above: Australian Consumer Price Index vs Trimmed Mean.

How Is The Consumer Price Index (CPI) Calculated?

Staff from the ABS investigate current prices on a fixed ‘basket’ of things that an Australian household would typically spend their money on.

It includes groceries, housing, transport, healthcare, entertainment, and utilities (around 1 million prices are collected every quarter).

They calculate the price change from the previous quarter in aggregate to determine an overall inflation rate.

What Is Inflation?

Inflation is a consistent, economically significant price rise across the economy.

Most often, inflation is caused by an imbalance in the supply and demand of money.

Why Is Inflation Dangerous?

Inflation can become a self-sustaining cycle. History is full of examples where out-of-control inflation brought relatively strong economies to their knees.

Higher prices make goods and services less affordable to everyday people, who demand higher wages again.

What Caused The Latest Spike In Australia's Inflation?

During lockdowns, the Australian government rolled out one of the most generous stimulus packages in the world.

Can Inflation Lead To A Recession?

Yes.

Rises in inflation, combined with interest rate rises, can force people to spend less while encouraging businesses to lay off employees. Unemployed people are less likely to buy goods and services, accelerating the downturn.

Final Words On Rising Inflation Rate In Australia.

While there’s always a risk that prices will continue to surge, most experts agree Australia’s core inflation rate will stabilise within the target range in 2025-26.

The end of government subsidies may cause a blip in the headline figure — but the cost of many essentials seems to be easing.

However, nobody knows for sure whether monetary policy — with the cash rate still at a restrictive 3.85% — will slow down spending enough and how the chips will fall in relation to other macroeconomic factors like global supply, GDP growth and unemployment.

Jody