Australian Inflation Rate: Will It Reach 2.5% In 2025?

Reading Time: 14 minutes

Despite the quarterly inflation figure for September 2024 being the lowest in three years and entering the targeted 2-3% target range, the Reserve Bank of Australia (RBA) held rates.

Its concerns about persistent underlying inflation were somewhat mollified by December’s Consumer Price Index (CPI) (released in January 2025) that showed headline inflation of 2.4% and trimmed mean of 3.2%.

The effect of 13 interest rate rises from the RBA across 2022-23 seem to be finally reducing price pressures.

Key Takeaways:
Inflation has fallen with the headline CPI at 2.4%, but households are still having to spend more on essentials.
Monthly inflation was trending upwards in early 2024 before a sharp decline to 2.7% in August. By December 2024 it was 2.5%.
Rents and services like insurance and healthcare 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.

But the RBA won’t truly be happy until the underlying inflation number reaches the midpoint of the target range too. It worries that easing too much, too soon, could see disinflation progress stall.

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?

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

Australian Inflation Rate Remains Stubbornly High.

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, there’s been a surprising retreat in vacancies, which declined from 1.6% in December 2024 to just 1.0% in January 2025.

Above: Inflation in what are known as non-discretionary goods — things like food, housing, rent, insurance, electricity, and health costs — was the lowest it’s been since March 2021.

Other significant price increases in the 12 months to December 2024 were:

The price rises across goods and services were offset by significant falls in the cost of electricity (-25.9% over 12 months) and fuel (-7.9%).

According to ABS head of prices statistics, Michelle Marquardt, lower electricity prices were the result of the 2024-25 Commonwealth Energy Bill Relief Fund rebates.

While housing and services inflation is still problematic, December’s CPI result was lower than expected.

In particular, underlying inflation slowing to 3.2% made the RBA cautiously confident that inflation is getting under control.

RBA Governor Michele Bullock did, however, warn homeowners that it could be a one-off, because upside risks to inflation remain.

“If we don't get inflation down, interest rates won't come down, and you'll be stuck with inflation and high interest rates,” she said.

Above: Data from PinPoint Macro Analytics shows that as lower interest rates work their way through the economy inflation can accelerate.

Economist Michael Blythe said Australia’s headline CPI growth was now ‘normal’ but our underlying CPI growth is running well above the pre-Covid average.

He said early gains in disinflation tend to be rapid and reasonably large, before progress slows:

Despite the cautious note, the prevailing view among economists is that another interest rate cut will happen in May 2025. The next federal election is expected to happen sometime before then too.

Is The Australian Economy Doing Worse Than The US?

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

In its latest forecast released in February, the RBA highlighted that many other central banks that had commenced lowering in late 2024 are now putting on the brakes.

Above: Australia’s underlying inflation relative to the target is comparable with other advanced economies.

But our labour market is also stronger than many peers.

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.

Financial markets were spooked after data released on 2nd August, 2024, revealed the US unemployment rate had increased above expectations to 4.3% in July.

While markets largely rebounded within days, calls for cuts by the Fed to stem economic concerns eventuated.

Emergency cuts weren’t needed. The Fed has since indicated more gradual easing was likely, and kept interest rates at 4.25-4.50% at its first meeting of 2025.

Chair Jerome Powell said the Fed would need to see:

The US CPI rises have been inching higher again: 0.2% in October, 0.3% in November, 0.4% in December 2024, and 0.5% in January 2025. That brought the annual rise to 3.0%.

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

On the US’ re-emerging inflation issue, Trump offered a characteristically flippant response:

AFR columnist Christopher Joye argues the Fed irresponsibly slashed rates to assist the Biden and Harris campaigns, concerned about a Trump administration that would undermine its powers.

He said financial markets could be in for a rude awakening if the Fed is forced to reverse its easing cycle, which “could involve a cataclysmic correction.”

What Is The Australian Government's Forecast?

In its 2024-25 Budget, Treasury forecast that inflation would return to the target range (2.75%) by mid-2025, which matches the RBA’s revised forecast of 2.7% (trimmed mean).

The RBA’s most recent outlook 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.

Ultimately, Aussies have more to spend so will likely spend a bit more (demand).

But finding and paying good staff is putting cost constraints on the supply side — in combination, these factors may keep core inflation just above the midpoint of the 2-3% range. The RBA said:

Despite below-trend GDP growth predicted in the coming year, both Commbank and Westpac believe the RBA won’t need to tighten rates further to quell inflation.

Commbank’s Gareth Aird said an extra cut in April was a possibility.

Between now and its April meeting the RBA will gain data on the labour market, monthly CPI indicators, and the Q4 national accounts figures due to be released by the ABS on 5th March.

He said jobs data would need to show “clear market loosening” (i.e., unemployment at 4.2%).

Furthermore, “the monthly CPI indicators would also need to point to a Q1 2025 trimmed mean outcome of 0.7% or below” for back-to-back cuts to eventuate.

Above: The RBA remains ready to hoist interest rates if significant price rises continue.

Westpac’s Chief Economist Luci Ellis said the RBA’s inflation goal seems to be on-track but a key driver of its hawkish tone was its view of the labour market, which has remained tight despite falling inflation:

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

Bank	2025 Q1	2025 Q2
Westpac	2.0% annual change 2.7% trimmed mean	1.7% annual change 2.4 trimmed mean
NAB	2.7% annual change 3.1 trimmed mean	2.4% annual change 2.9% trimmed mean
CommBank	3.1% annual change 3.3% trimmed mean
ING	2.2% annual change	1.9% 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 much-celebrated Israel-Hamas ceasefire deal is tenuous and its current phase is due to end in March. It's yet to be seen if we’ve truly seen the end of the conflict that raged for 15 months.

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.

2. Rising Employment And Wages.

The Australian job market was on fire in 2023, with the lowest unemployment in history and a 7.1% rise in labour costs.

(The fastest rise in any other advanced economy).

Economic forecasts point to only a slight softening of the labour market into 2025.

Employment has been resilient.

In June 2024, the Fair Work Commission announced a 3.75% increase to minimum and award wages this year — which the Albanese Government argued for to ease the cost of living pressure on low-paid workers.

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 2024-25 included measures aimed at reducing inflation, such as a $300 energy bill rebate for all Aussies, and a 10% boost to Commonwealth rent assistance.

These temporary inflation busters 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).

Treasurer Jim Chalmers isn’t hyping up the chances of a surplus in the 2025-26 budget due in March, but there could be some cost-of-living sweeteners:

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 6.4% annually, according to the latest CPI numbers.

It would have been a 7.8% annual increase to December 2024 without the availability of subsidies through the Commonwealth Rent Assistance (CRA) program.

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 has been one of the worst among advanced economies.

While many countries — the US and UK included — have experienced rising inflation of late, there’s evidence that inflation is easing more quickly elsewhere.

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

Then the UK’s CPI saw a small bump, recording an inflation rate of 2.2% in both July and August. In October it fell to 1.7%, but November saw a higher-than-expected jump to 2.3%, and then 2.5% in December.

As of January 2025, the UK’s CPI was back up to 3.0%.

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

In its economic outlook published in December, the OECD said that growth was stabilising and inflation had moderated back to central bank targets in many economies. 

However, services inflation was persistent and was set to remain so — at a median rate of 4.0% across OECD economies.

It sees the key risks being geopolitics disrupting energy and supply chains — driving inflation higher — and a more fragmented trading environment that also raises prices.

While the OECD said central banks now had more scope to cut policy rates, it warned:

Above: Projected inflation rates for 2024 (Australia, Eurozone, UK, US, Canada & Japan).

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 3.2%.

Above: 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, like 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 in 2025.

The end of government subsidies could 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 4.10% — 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