Australia's inflation eases in June quarter

The Consumer Price Index (CPI) fell 0.1% in June, taking the annual headline inflation figure to 3.8%, down from 4.0% in May. 

Underlying inflation, measured by the trimmed mean, was unchanged at 3.6%.

The weaker-than-expected result is likely to ease pressure on the RBA to tighten monetary policy further when its monetary policy board convenes on 10-11 August.

In its latest forecast in May, the RBA had trimmed mean inflation to land higher at 3.8% by the June quarter. 

Policymakers prefer the trimmed mean measure because it strips out large price swings and provides a clearer indication of underlying inflation pressures across the economy.

"When we look through some of the bigger price movements, underlying inflation is steady at 3.6% in the 12 months to June 2026," ABS head of price statistics Rachael McCririck said.

Ahead of Wednesday's release, markets and the big four banks had tipped core inflation to accelerate 0.9% over the quarter and the annualised figure to land at 3.7%. 

Actual results came in below expectations 

Headline inflation also undershot forecasts of 4.0% annual growth, helped by easing transport costs. 

Housing remains a key inflation driver

Housing continued to exert upward pressure on inflation, with prices rising 6.8% over the year, driven by higher electricity and new dwelling costs.

Electricity prices surged 22.4% annually following the expiry of government rebates.

Meanwhile, annual inflation for new dwellings climbed to 5.8%, its "highest level in almost three years".

"This was driven by builders passing on higher material and labour costs," Ms McCririck said. 

New dwelling prices, which include the costs of owner occupiers buying newly constructed homes, account for around 8% of the CPI basket.

In contrast, rents were unchanged in June and rose 3.6% over the year, defying expectations of a further increase.

Economists expect rental growth to remain firm in the second half of the year amid low vacancy rates and tax changes affecting new investor lending. 

See also: SMSF and tax changes risk tightening rental market

Westpac had pencilled in rent inflation to peak at 4.0% in October.

As expected, recreation and culture also contributed to June quarter inflation, with prices accelerating 3.3% over the year.

"Prices for holiday travel and accommodation rose 4.6% in June, driven by more travel to the northern hemisphere with the start of their peak tourist season and higher jet fuel prices," Ms McCririck said. 

Fuel provides offset, but risks remain

Transport prices were the biggest drag on headline figures, rising just 0.1% in June after increasing 3.3% in May.

"Lower world oil prices as a result of some stabilisation in the Middle East in June contributed to fuel prices falling 10.9% in the month," Ms McCririck said. 

According to the ABS, lower petrol prices and government energy support measures have provided some downward pressure on headline inflation.

The federal government earlier extended fuel excise relief through July. 

However, economists cautioned that this temporary relief, along with the renewed tension in the Middle East, could drive prices higher. 

"Headline inflation looks to be peaking much lower than the RBA feared, but fuel prices are set to rise again in Q3," NAB head of rates strategy Ken Crompton said. 

NAB senior economist Taylor Nugent said the Middle East conflict posed an upside risk to inflation. 

"The earlier falls in fuel costs meant a smaller short-term shock, but the recent reversal points to a rolling grind as higher and volatile costs flow through," Mr Nugent said. 

All eyes on the RBA

Prior to Wednesday's data, major bank economists broadly expected the RBA to leave the cash rate unchanged in August. 

Markets were pricing in a 78% chance of rates remaining on hold next month. 

In a speech at a fundraising event in Sydney on Tuesday, RBA Governor Michele Bullock said the economy was slowing broadly as anticipated after three interest rate hikes. 

However, she reiterated the Board remains prepared to raise rates again if inflation proves more persistent than expected.

"We interpreted the speech as the RBA being patient and willing to see how the economy responds to tighter monetary policy before acting further," CommBank economist Ashwin Clarke said. 

Despite the recent surprise surge in employment, Australia's biggest bank expects the RBA to keep the cash rate on hold for the rest of the year. 

NAB and ANZ agree the current hiking cycle is over.

Falling in line with its big four peers, Westpac no longer expects any further RBA hikes this year after inflation came in "more benign" than previously anticipated. 

However, chief economist Luci Ellis said the risk of a November rate hike remains if inflation reaccelerates in the September quarter.

"We therefore expect the communication of the RBA to stay hawkish and not rule out further hikes, similar to the language in June," she said.