Inflation and interest rates in 2026: what changed and what comes next
After falling back to target in 2025, inflation has climbed to 4.0% and the Reserve Bank has raised the cash rate four times this year. What is behind the rise, how far it has spread, and what the Reserve Bank expects from here.
A little over a year ago, Australia looked close to winning its fight with inflation. By mid 2025 underlying price growth had returned to the Reserve Bank's 2 to 3% target band, and by August 2025 the cash rate had been cut three times. Today annual inflation is 4.0%, the cash rate is 4.60% and the Reserve Bank does not expect inflation to be back in the middle of its target until early 2028.
This article sets out what changed, which prices are rising fastest, and what the Reserve Bank's decisions mean for the year ahead.
- Annual inflation, August 2026
- 4.0%
- ABS
- Trimmed mean inflation, August 2026
- 3.6%
- ABS
- RBA cash rate target since 30 September 2026
- 4.60%
- RBA
- Wage growth over the year to June 2026
- 3.2%
- ABS
From the target band and back out
Inflation peaked close to 8% at the end of 2022. The Reserve Bank lifted the cash rate thirteen times between May 2022 and November 2023, from 0.10% to 4.35%, and inflation came down through 2023 and 2024, with a brief pause in mid 2024. By mid 2025 headline inflation had dipped below 2% and the trimmed mean was inside the target band. The Reserve Bank cut rates in February, May and August 2025, taking the cash rate to 3.60%.
The improvement did not last.
Inflation has moved back above the target band
Annual change in consumer prices, per cent. Quarterly figures to March 2025, monthly figures from April 2025, shown at the end of each quarter and for August 2026
Show the figures
| Period | Headline inflation | Trimmed mean |
|---|---|---|
| Sep 2022 | 7.3% | 6.0% |
| Dec 2022 | 7.9% | 6.8% |
| Mar 2023 | 7.0% | 6.5% |
| Jun 2023 | 6.0% | 5.8% |
| Sep 2023 | 5.3% | 5.1% |
| Dec 2023 | 4.1% | 4.2% |
| Mar 2024 | 3.6% | 4.0% |
| Jun 2024 | 3.8% | 4.0% |
| Sep 2024 | 2.9% | 3.6% |
| Dec 2024 | 2.4% | 3.2% |
| Mar 2025 | 2.4% | 2.9% |
| Jun 2025 | 1.9% | 2.8% |
| Sep 2025 | 3.6% | 3.2% |
| Dec 2025 | 3.8% | 3.3% |
| Mar 2026 | 4.6% | 3.3% |
| Jun 2026 | 3.8% | 3.6% |
| Aug 2026 | 4.0% | 3.6% |
Reading the chart
- What it shows
- Headline inflation fell from 7.9% at the end of 2022 to 1.9% in June 2025, just under the bottom of the Reserve Bank's 2 to 3% target band, then climbed back to 4.0% by August 2026. The trimmed mean, which leaves out the largest price moves in either direction, followed a smoother path and has been above 3% since September 2025.
- What it means
- The gap between the two lines tells the story. Headline inflation swings with fuel and electricity, but the trimmed mean shows the underlying trend, and it has risen steadily for a year. That is why the Reserve Bank watches the trimmed mean so closely: the pressure on prices is broader than oil, and higher fuel prices are now passing through to the prices of other goods and services.
- How to respond
- Do not plan on inflation falling back quickly just because fuel prices fall. Budget for costs to keep rising at around today's underlying rate of 3.6% until the evidence shows otherwise, and check which supplier contracts and leases are indexed to the consumer price index, because they will reset at these higher rates.
Inflation started rising again in the second half of 2025, well before the oil shock. Headline inflation was 3.8% by December 2025, pushed up by electricity bills as state government rebates in Queensland and Western Australia were used up, and the trimmed mean had moved back above 3%, to 3.3%. The Reserve Bank reversed course and raised the cash rate in February 2026.
Then came the conflict in the Middle East, which began at the end of February. Attacks on shipping in the Strait of Hormuz disrupted oil supplies and pushed global oil prices sharply higher, and Australian fuel prices followed. The Federal Government cut fuel excise by 32 cents a litre in the first weeks of the crisis, halved the cut to 16 cents in July and ended it on 3 August. Headline inflation reached 4.6% in March, and the Reserve Bank lifted the cash rate again in March and May.
After holding in June and August, the Reserve Bank raised the cash rate a fourth time on 29 September, to 4.60%. Its statement said some of the upside risks to inflation it had flagged in August were materialising, that oil supply disruptions were keeping energy prices high, and that higher fuel prices were starting to pass through to the prices of other goods and services.
Four rises in 2026 have taken the cash rate to its highest level since 2011
RBA cash rate target at the end of each month, per cent
Show the figures
| Period | Cash rate target |
|---|---|
| Jan 2022 | 0.10% |
| Feb 2022 | 0.10% |
| Mar 2022 | 0.10% |
| Apr 2022 | 0.10% |
| May 2022 | 0.35% |
| Jun 2022 | 0.85% |
| Jul 2022 | 1.35% |
| Aug 2022 | 1.85% |
| Sep 2022 | 2.35% |
| Oct 2022 | 2.60% |
| Nov 2022 | 2.85% |
| Dec 2022 | 3.10% |
| Jan 2023 | 3.10% |
| Feb 2023 | 3.35% |
| Mar 2023 | 3.60% |
| Apr 2023 | 3.60% |
| May 2023 | 3.85% |
| Jun 2023 | 4.10% |
| Jul 2023 | 4.10% |
| Aug 2023 | 4.10% |
| Sep 2023 | 4.10% |
| Oct 2023 | 4.10% |
| Nov 2023 | 4.35% |
| Dec 2023 | 4.35% |
| Jan 2024 | 4.35% |
| Feb 2024 | 4.35% |
| Mar 2024 | 4.35% |
| Apr 2024 | 4.35% |
| May 2024 | 4.35% |
| Jun 2024 | 4.35% |
| Jul 2024 | 4.35% |
| Aug 2024 | 4.35% |
| Sep 2024 | 4.35% |
| Oct 2024 | 4.35% |
| Nov 2024 | 4.35% |
| Dec 2024 | 4.35% |
| Jan 2025 | 4.35% |
| Feb 2025 | 4.10% |
| Mar 2025 | 4.10% |
| Apr 2025 | 4.10% |
| May 2025 | 3.85% |
| Jun 2025 | 3.85% |
| Jul 2025 | 3.85% |
| Aug 2025 | 3.60% |
| Sep 2025 | 3.60% |
| Oct 2025 | 3.60% |
| Nov 2025 | 3.60% |
| Dec 2025 | 3.60% |
| Jan 2026 | 3.60% |
| Feb 2026 | 3.85% |
| Mar 2026 | 4.10% |
| Apr 2026 | 4.10% |
| May 2026 | 4.35% |
| Jun 2026 | 4.35% |
| Jul 2026 | 4.35% |
| Aug 2026 | 4.35% |
| Sep 2026 | 4.60% |
| Oct 2026 | 4.60% |
Reading the chart
- What it shows
- The cash rate rose from 0.10% in April 2022 to 4.35% in November 2023 and stayed there for more than a year. Three cuts in 2025 took it to 3.60%, and four rises in 2026 have taken it to 4.60%.
- What it means
- The relief of 2025 has been more than reversed. A business that borrowed or refinanced expecting rates to keep falling is now paying a full percentage point more than at the start of the year if its lender has passed on every rise: about $10,000 a year in extra interest on each $1 million of variable debt.
- How to respond
- Questions worth taking to a lender and an accountant now, rather than in a hurry later: what the repayments would be with the cash rate another half a percentage point higher, how much headroom remains under any loan covenants, and whether fixing part of the debt, or paying down the most expensive facility first, would reduce the risk.
What is pushing prices up
Energy has done the most damage. Automotive fuel was 13.5% more expensive in August than a year earlier, and rose 14.8% in August alone as the excise cut ended. Electricity was up 13.2% over the year, which the ABS attributes largely to the end of Commonwealth electricity rebates.
Fuel and electricity lead, but the rises are broad
Annual change in prices to August 2026, per cent
Reading the chart
- What it shows
- Fuel, up 13.5%, and electricity, up 13.2%, rose fastest over the year to August. But insurance, up 5.6%, new homes, up 5.4%, and rents, up 3.6%, also rose faster than the top of the Reserve Bank's target band. Of the groups shown, only food, at 3.0%, was within it.
- What it means
- Two different problems are running at once. Fuel and electricity are driven by events overseas and by the timing of government rebates, and they could ease almost as quickly as they rose. Insurance, building costs and rents reflect local demand, wages and risk, and they tend to move slowly in both directions. The second group is why inflation is likely to stay above target even if oil prices fall.
- How to respond
- Treat the two groups differently in a budget. For fuel and energy, reduce exposure where it can be done: a better retail plan, fewer and fuller deliveries, more efficient vehicles and equipment. For rent, insurance and building work, assume the increases are here to stay, and negotiate on the terms, such as the length of a lease, how its rent is reviewed and the excess on a policy, rather than waiting for prices to fall.
The more worrying signs for the Reserve Bank are further down the list. Builders have kept lifting base prices for new homes, which were 5.4% dearer than a year earlier. Insurance rose 5.6%. Rents rose 3.6%, unchanged since May. Prices of services, which reflect wages and local demand more than global events, rose 3.7%, and goods prices rose 4.2%. When price rises are this widespread, a fall in oil prices alone would not bring inflation back to target quickly.
Housing costs contribute the most to the annual rate, at 1.24 percentage points of the 4.0%, followed by transport and food.
Why the Reserve Bank keeps raising rates
The Reserve Bank's job is to keep inflation between 2 and 3% over time. When inflation runs above that for long, the risk is that businesses and workers start to expect it and set prices and wages accordingly, which makes it harder to bring down. The Board's message in September was that it will keep tightening if that is what it takes to bring inflation sustainably back to target.
There are signs that higher rates are working. Unemployment has risen from 4.4% in May and June to 4.6% in August. The economy grew by 0.4% in the June quarter and by 2.1% over the year, but only 0.7% per person. The Reserve Bank itself notes that housing prices have fallen in most capital cities and that new housing loans have declined noticeably, and that growth in consumer spending is easing.
The cost is felt most by people with large mortgages and by workers whose pay is not keeping up. Wages grew 3.2% in the year to June, below inflation, so on average pay is falling behind prices. Award wages rose 4.75% from 1 July and the national minimum wage rose to $26.44 an hour, which helps the lowest paid, but many employees are paid under enterprise agreements or above the award.
In its August Statement on Monetary Policy, the Reserve Bank said inflation would stay high in the near term because of the Middle East conflict and domestic price pressures, and that it does not expect inflation to return to the middle of the target range until early 2028.
What it means for households
For borrowers, lenders generally pass each rate rise on to variable mortgage rates, so repayments rise with each decision. Westpac's October survey found that more than 80% of consumers surveyed after the September decision expect mortgage rates to rise again over the next year, and consumer sentiment fell to 80.4, well below the neutral level of 100.
For everyone else, the squeeze comes through fuel, power and insurance, which are hard to avoid, and through rents. So far households have kept spending: discretionary spending was 7.2% higher in August than a year earlier, ahead of essential spending, although higher prices account for much of the increase.
What it means for businesses
For businesses, higher inflation means rising costs on several fronts at once: wages, fuel and freight, insurance and borrowing. Businesses also find it harder to pass those costs on when their customers are under the same pressure. We look at the evidence, and at the responses that are working, in how inflation is reshaping business in 2026.
Three cases to plan for
Nobody can say with confidence where inflation and interest rates will be a year from now. What a business can do is decide in advance how it would respond to each of the plausible paths. These are the three cases we use to test a plan. They are planning cases, not forecasts.
| Case | What would have to happen | What it would mean for a business |
|---|---|---|
| As the Reserve Bank forecasts | Underlying inflation eases to 3.3% by December 2026 and 3.0% by mid 2027, and reaches the middle of the target in 2028. Interest rates stay close to today's level | Costs keep rising faster than usual for another year, then ease. Confidence recovers slowly. The risk is spending early on relief that arrives late |
| Stickier | Underlying inflation stays around 3.5% through 2027, and the Reserve Bank raises rates further | Wages, rent and insurance keep rising faster than many businesses can lift their prices, and margins stay under pressure through 2027 |
| A second shock | A further jump in oil prices, or faster growth in wages, pushes inflation back above 4.5%. The Reserve Bank raises rates several more times | Customers cut back further, borrowing costs rise again and weaker competitors fail. Businesses with cash and little debt can gain ground |
Reading the cases
- What it shows
- The three cases run from the Reserve Bank's own forecast, in which underlying inflation is back to about 3% by the middle of 2027, to a second round of price and rate rises.
- What it means
- The Reserve Bank's forecast is its best judgement of the most likely path, but its September statement said some of the upside risks it had flagged in August were already materialising. A business that only works if the forecast comes true is taking a risk it does not need to take. In our view the second shock is the least likely of the three, but it is the case that decides whether a business comes through at all.
- How to respond
- Build the budget on the stickier case, so that the forecast path is a welcome surprise rather than a requirement. Write down now what would be done if a second shock arrived, and which early signs would set that plan in motion, so the response is quick. Keep the opportunities of an easing in view, but fund them only once the evidence arrives.
What to watch
- The September inflation figures, due later this month. Another rise would make a further rate increase more likely. A fall in fuel prices would help the headline rate, but the trimmed mean matters more to the Reserve Bank.
- The Reserve Bank's November decision, and its updated forecasts in the November Statement on Monetary Policy.
- Oil prices and the Middle East. The Reserve Bank has noted that the conflict remains unresolved. Energy prices could move sharply in either direction.
- Unemployment. A gradual rise is what the Reserve Bank expects. A faster one would change the balance of its decisions.
- Rebates and one off effects. Some of this year's increase in electricity prices reflects the timing of rebates in 2025. As those effects drop out of the annual comparison, they should stop adding to headline inflation, even if underlying pressures remain.
Conclusion
Inflation in Australia has proved stickier than it looked a year ago. Fuel and electricity explain the size of this year's rise. The broader rise in the prices of services, insurance and housing, together with fuel feeding through to other prices, explains why the Reserve Bank has raised rates four times and does not expect inflation to be back in the middle of its target until 2028.
For businesses and households, the sensible conclusion is not to wait for relief. Plan on costs and interest rates staying higher for longer than anyone would like, prepare for a worse case, and treat any easing as a bonus rather than the plan. That is the approach we are taking with our first investment: we assume costs stay higher for longer, and we plan so that the business works on those numbers.
Sources
- ABS, Consumer Price Index, Australia, August 2026
- Reserve Bank of Australia, Cash rate target
- Reserve Bank of Australia, Monetary Policy Decision, 29 September 2026
- Reserve Bank of Australia, Statement on Monetary Policy, August 2026
- ABS, Wage Price Index, Australia, June 2026
- ABS, Labour Force, Australia, August 2026
- ABS, Australian National Accounts, June quarter 2026
- ABC News, Fuel excise cut ending, 2 August 2026
- NRMA, Fuel costs and supply in Australia, September 2026
- ABS, CPI rose 3.8% in the year to December 2025
- ABS, Monthly Household Spending Indicator, August 2026
- Westpac-Melbourne Institute, Consumer Sentiment, October 2026
- Fair Work Ombudsman, Minimum wages increase from 1 July 2026
This article is general information about Threefold Capital and the businesses it follows. It is not financial advice, and it is not an offer or an invitation to invest. The views are the firm's own at the date of publication.