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Inflation Continues to Ease, But Uncertainties Linger for Australian Economy

Australia’s inflation continues its downward trend, significantly moderating since its 2022 peak, as higher interest rates work to bring economic demand and supply back into equilibrium. However, the path ahead remains uncertain, with global complexities and domestic nuances creating a cautious outlook.

In the March quarter, headline inflation — partially softened by temporary cost-of-living relief — landed squarely within the Reserve Bank of Australia's (RBA) target range. Trimmed mean inflation, a key underlying measure, registered at 2.9 per cent. The RBA's May forecast projected underlying inflation to gradually cool further, aiming for the midpoint of the 2-3 per cent target range, anticipating a measured easing of the cash rate.

While recent monthly CPI Indicator data suggests June quarter inflation is likely to align with forecasts, it was "at the margin, slightly stronger than expected," according to the RBA. With the cash rate 50 basis points lower than five months ago and broader economic conditions evolving largely as anticipated, the RBA Board opted to await further data to confirm inflation's sustained trajectory towards 2.5 per cent.

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Global Headwinds and Domestic Resilience

The global economic landscape remains fraught with uncertainty. The full impact of US tariffs and potential policy responses from other nations is still unknown, though financial markets have shown some rebound amid hopes that the most extreme outcomes will be avoided. Nevertheless, trade policy developments are still expected to exert a negative influence on global economic activity, and there's a lingering risk that households and businesses may postpone spending until greater clarity emerges.

Domestically, private demand appears to be on a gradual recovery path. Real household incomes have seen an uptick, and some indicators of financial stress have eased. Despite this, businesses in certain sectors report ongoing weakness in demand, making it challenging to pass on cost increases to consumers.

Tight Labor Market, Productivity Woes Meanwhile, the labour market remains tight. Measures of labour underutilisation are at relatively low levels, and business surveys consistently indicate that labour availability continues to be a constraint for many employers. While wage growth has softened from its peak, productivity growth has not kept pace, resulting in continued high growth in unit labour costs.

The outlook for domestic economic activity and inflation is subject to various uncertainties. March quarter national accounts confirmed that domestic demand has been picking up over the past six months, with May forecasts predicting continued growth in household consumption as real incomes rise. However, there's a risk that this pick-up could be slower than anticipated, potentially leading to subdued aggregate demand and a sharper deterioration in the labour market than currently projected. Conversely, leading indicators suggest that labour market outcomes could prove stronger than expected.

Further uncertainties surround the time lag of recent monetary policy easing and how firms' pricing decisions and wages will react to the balance of demand and supply, tight labour market conditions, and persistent weak productivity.

Prioritising Stability Amidst Caution

The RBA Board maintains that the risks to inflation have become more balanced, and the labour market remains robust. Nevertheless, it remains cautious about the outlook, especially given the heightened uncertainty surrounding both aggregate demand and supply. The Board's decision to wait for more information underscores its commitment to ensuring inflation is sustainably on track to reach 2.5 per cent. The RBA also noted its readiness to respond decisively to international developments if they were to significantly impact Australian activity and inflation.

The Board will continue to closely monitor incoming data and evolving risk assessments to guide its decisions, paying particular attention to the global economy, financial markets, domestic demand trends, and the outlook for inflation and the labour market. The RBA remains steadfast in its mandate to deliver price stability and full employment, pledging to take all necessary measures to achieve these outcomes.

In a move towards increased transparency, the RBA Board has decided to publish an unattributed record of votes in its post-meeting statement. Today’s policy decision was made by majority, with six members voting in favour and three against.

Source: Reserve Bank of Australia [2025] 

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