Shock inflation spike dashes hopes for rate cuts

RBA Governor Michele Bullock is set to face pressure over the inflation target. Picture: Christian Gilles / NewsWire

Aussie households have been hit with another financial shock, as inflation comes roaring back, crushing hopes for more rate cuts, with at least one now off the table for the Reserve Bank.

Australian Bureau of Statistics found the monthly Consumer Price Index (CPI) jumped 2.8 per cent in the year to July 2025, hitting the extreme end of the RBA’s 2-3pc inflation target band.

ABS head of prices statistics Michelle Marquardt said “this is the highest annual inflation rate since July 2024, following several months of easing inflation”.

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All groups monthly CPI indicator. Source: ABS

The move is a sharp rise from its 1.9pc level in June, an increase which puts fresh pressure on the Reserve Bank to keep its options open to even raise rates if needed.

One of the biggest segments that rose were housing costs, up 3.6 per cent in the past 12 months, outpacing surges in food and non-alcoholic drinks (3pc), though alcohol and tobacco put on a large 6.5pc increase.

But the biggest spike was a massive 13.1pc surge in electricity prices over the past year, skyrocketing 13pc in July alone after New South Wales and Australian Capital Territory homes did not receive their usual Energy Bill Relief Fund payments that month.

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The number of rate cuts ahead may be in doubt now for 2025.

Underlying inflation which strips out volatile categories like fuel and holiday travel was also flashing red, according to the data, up 3.2 per cent in July compared to a 2.5pc increase the month before.

Another closely watched measure – trimmed mean inflation – also climbed from 2.1pc to 2.7pc, which could mean price pressure is becoming widespread.

“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,” Ms Marquardt said.

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New dwellings and rent annual movement. Source: ABS

Belinda Allen, head of economics for Australia’s biggest bank CommBank, said the RBA minutes for August had shifted the focus from CPI to the labour market – with a September rate cut now off the table.

”Upside risks to inflation have now been superseded by potential downside risks to the labour market,” she said.

“A further 25bp rate cut in November looks locked in, an earlier rate cut in September is unlikely and would only occur if labour market data deteriorated significantly.”

Ms Allen said the RBA August Minutes showed much of the board’s 2025 focus was on ensuring inflation returned sustainably to the mid‑point of its target band.

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Grocery products annual movement. Source: ABS

She said “members of the board unanimously agreed that ‘information received since the previous meeting had provided the further support that they had been seeking for the judgement that inflation was heading sustainably towards the midpoint of the target range’.”

CBA expects RBA’s next cut to come in November by 25bp.

“A deterioration in the labour market, or a faster and steeper moderation in CPI could speed up cuts.”

“We currently see the cash rate troughing at 3.35pc but if the pick‑up in the economy is slower than we expect than further easing is likely over the coming year.”

The next RBA board meeting to consider the cash rate target is set for September 29‑30 with today’s CPI plus a second monthly CPI set to influence its deliberations, along with Q2 25 GDP data on September 3 and new labour market data on September 18.

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