Last updated: May 23rd, 2025
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 at 4.35% at its final meeting of 2024.
However, two interest rate cuts have now been delivered in 2025:
- Underlying inflation fell to 3.2% (with headline inflation at 2.4%) in the December quarter Consumer Price Index (CPI), prompting a 0.25% cash rate cut in February.
- The cash rate was cut by a further 25 basis points on 20 May 2025, following a decline in underlying inflation to 2.9% in the March quarter CPI.
But it’s unclear if an easing cycle is truly underway, with global tensions prolonging the risks of an inflation breakout.
| Key Takeaways: |
|---|
| Inflation has fallen with the headline CPI at 2.4% and trimmed mean at below 3%, but households are still having to spend more on essentials. |
| 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. |
On the one hand, the effect of 13 interest rate rises from the RBA across 2022-23 seem 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.
Important!
At this stage, the RBA thinks underlying inflation will remain around the midpoint of the target 2-3% range over the coming years.
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?
Above: Australia’s pace of disinflation has stalled. It’s the slowest disinflation cycle in the modern monetary policy era (post-1990).
Is Australia Finally Turning the Corner On Inflation?
The March 2025 CPI print revealed that trimmed mean inflation – the Reserve Bank’s preferred measure – slowed to 2.9%, 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, there have been mixed results:
- A surprising retreat in vacancies was seen in January 2025, declining from 1.6% in December 2024 to just 1.0%.
- The national vacancy rate increased to 1.1% in March and rose again in April 2025 to 1.3%.
- National asking rents have risen by 3.9% over the 12 months to April 2025 – with the average weekly rent at $650.
- Supply increased most in Melbourne and Sydney – other capitals have tight markets that still favour landlords.
Above: Inflation in services is still high, but eased to 3.7% (compared to 4.3% in December) – thanks to lower rents and insurance.
Did you Know?
March quarter CPI figures show rental prices rose 5.5% annually – down from 7.8% in the 2024 March quarter, which was the strongest rise in 15 years.
Leigh Merrington, ABS acting head of prices statistics said:
Other significant price increases in the 12 months to March 2025 were:
- Electricity (16.3%).
- Fruit and vegetables (6.6%).
- Meat and seafood (4.3%).
- Insurance (7.6%).
- Education fees (5.7%).
- Alcohol and tobacco (6.5%).
- Medical and health services (4.1%).
- Vet and pet services (5.8%).
Significant falls in the cost of electricity (-25.9% over 12 months) seen in the previous quarter were substantially retraced due to federal government energy bill subsidies ending or getting smaller.
(Related: How Is The Australian Economy Doing?)
While housing, food and services inflation is still problematic, March’s CPI result primed the market to expect an interest rate cut in May.
Important!
The RBA came through, and lowered its policy rate by 0.25% on 20th May, 2025.
In particular, underlying inflation slowing to 2.9% made the RBA cautiously confident that “risks to inflation have become more balanced.”
RBA Governor Michele Bullock did, however, warn that a long series of cuts was far from assured.
She acknowledged homebuyer fears that a rate reduction would drive up housing prices - but said it wasn’t the RBA’s remit to worry about.
In her view, "other policies are really going to have to step up here and address what is a housing shortage."
Bullock said the RBA believes the fallout from Donald Trump’s tariffs would overall be disinflationary, but it was alert to upside risks.
Important!
Analysis from Pinpoint MacroAnalytics finds underlying inflation rates tend to lift, although modestly, during the first year of easing cycles.
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 1-2 interest rate cuts will happen in 2025.
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.
In its latest forecast released in May, the RBA highlighted that:
- US tariffs will probably lead to higher inflation in the US short-term, with consumer sentiment already dropping sharply.
- Globally, weaker demand could lessen inflation, but disruptions to manufacturing supply chains could pose upside risks.
Market expectations for the path of policy rate easing have reduced slightly, compared to expectations in February.
Above: Markets now expect rates to ease by more to offset the impact of trade barriers - lighter dashed lines show implied expectations in February.
Consumer sentiment and business investment in Australia have remained resilient so far.
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.
Important!
The Fed has been on hold so far in 2025, coming under fire from President Trump, who said in May they should cut rates “sooner, rather than later.”
Financial markets were spooked in April 2025 after Trump’s ‘Liberation Day’ announcement, in which he applied a universal 10% tariff on all imported goods and higher rates on countries such as China.
While markets largely rebounded within weeks, the Fed said risks to US inflation and unemployment had risen.
The Fed said in May it was concerned about stagflation - although economic activity continues to expand.
Chair Jerome Powell:
The US CPI was negative in March 2025, but started inching higher again: 0.2% in April. That brought the annual rise to 2.3%.
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.
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 will hit the middle of the target range (2.5%) by the June quarter.
The RBA’s revised forecast is for headline inflation of 2.1% by mid-2025 and a trimmed mean of 2.6%.
Further out, the RBA’s most recent outlook sees:
- Headline inflation lifting to 3.0% by December (compared to 3.7% forecast in February).
- Underlying (trimmed mean) inflation remaining steady at 2.6% in December (previous forecast 2.7%).
Important!
While it revised down its trimmed mean inflation forecast, the RBA also sees core inflation being stuck at 2.6% (the target is 2.5%) throughout 2025 and 2026.
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.
Important!
Both banks are currently predicting two additional 25 basis point cuts to the cash rate in 2025.
Commbank’s Gareth Aird said an extra cut in July was a possibility if the domestic data makes the case or the trade war worsens.
The Q2 national accounts figures are due to be released by the ABS on 4th June, but the next CPI data won’t arrive until 30th July.
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).
AMP’s Chief Economist, Dr Shane Oliver, said the inflation moving back to the midpoint of the target sooner than expected bodes well for more rate cuts.
Predictions for the consumer price index headline rate in 2025 from the banks include:
| Bank | 2025 Q2 | 2025 Q4 |
|---|---|---|
| Westpac | 2.2% annual change 2.7% trimmed mean | 3.4% annual change 2.8 trimmed mean |
| NAB | 2.4% annual change 2.9 trimmed mean | 3.0% annual change 2.7% trimmed mean |
| ING | 2.0% annual change | 2.8% annual change |
What Factors Cause Inflation To Persist?
You can look at the Australian economy in one of two ways:
- Close-up. Consider interest rate rises, inflation data, food prices, unemployment rate, etc.
- Big picture. Study geopolitical issues, long-term trends and historical patterns.
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.
Expert Tip.
Market shocks could also arise from upheaval caused by changing governments, as the US, UK and India have all headed to the polls this year.
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.
Important!
More expensive oil contributes to the already strained cost of living in major economies like the US.
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 - which the Albanese Government argued for to ease the cost of living pressure on low-paid workers.
The Wage Price Index rose by 3.4% annually based on data from the March 2025 quarter.
Expert Tip.
Combined with rising real wages, it gives people more money to spend, increasing demand for goods and services and the impetus for corporations to lift prices.
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 5.5% 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.
Did You Know?
US annual CPI fell in March 2025 by 0.1% before a slight increase in April — bringing annual inflation to 2.3%.
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.
But it started rising again in late 2024, and in April 2025 the UK’s CPI was 3.5% — the highest it’s been in more than a year.
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 March, the OECD said that growth was softening, with inflationary pressures lingering in many economies.
Headline inflation had flared up in a number of nations - and the median rate of services inflation was 3.6% across OECD economies.
Above: Saudi Arabia, 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.
- Headline inflation describes the overall quarterly and year-over-year change in goods and services prices, based on the entire basket of items the ABS uses to calculate price changes. This can be distorted by Black Swan events (e.g., when flooding hurt veggie producers, causing a spike in the price of the humble lettuce).
- Underlying inflation is based on analytical measures of the CPI, intended to omit or smooth over quarterly price volatility. Underlying inflation calculations provided by the ABS include the Trimmed mean and Weighted median.
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 2.9%.
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, 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.
- The ABS also publishes price changes across various groupings of goods and services — as some areas contribute more significantly to headline inflation.
- For example, in the 12 months to the December 2024 quarter, insurance prices rose 11%.
What Is Inflation?
Inflation is a consistent, economically significant price rise across the economy.
Practical Example.
If the average price of insurance and financial services rose by $1,000 across the country, that would be considered inflation. If the price of these services rose in a single city, it would not be considered inflation.
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 encourage workers to demand higher pay.
- Higher pay translates into higher overheads for businesses.
- Businesses charge higher prices to maintain profitability.
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.
Did You Know?
The definition of 'recession' is two consecutive quarters of negative GDP growth.
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
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