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An inflation ambush: Australia’s 2.8% price spike shatters rate-cut hopes

by August 27, 2025
by August 27, 2025

A brutal inflation surprise has sent a jolt through the Australian economy, as consumer prices jumped far more than expected in July, dealing a significant blow to hopes for another interest rate cut from the nation’s central bank next month.

The data reveals a complex and stubborn inflation picture, forcing investors to dramatically recalibrate their expectations for the path of monetary policy.

The shock came in the form of a 2.8 percent annual inflation rate, according to data released Wednesday by the Australian Bureau of Statistics.

This was a sharp acceleration from the 1.9 percent recorded in June and blew past the median forecast of 2.3 percent.

The news immediately sent a shudder through the markets, with investors slashing the probability of a September rate cut from the Reserve Bank of Australia (RBA) from about 30 percent to just 22 percent.

The anatomy of a spike: a rebate reversal

The primary culprit behind the inflationary surge was a massive spike in electricity costs. In the month of July alone, electricity prices jumped 13 percent, a move directly linked to the timing of government energy rebates.

“This means that those households had higher out-of-pocket costs for electricity in July. In addition to this, prices rose due to annual electricity price reviews coming into effect,” explained Michelle Marquardt, the head of prices statistics at the ABS, to Reuters.

She noted that new rebates would be reflected in August’s data, suggesting some of the spike will be temporary.

But it wasn’t just energy. Robust demand during school holidays also pushed holiday travel and accommodation costs up by 5 percent.

A central bank in a bind: the sticky problem of core inflation

While some of the headline spike can be attributed to temporary factors, a more worrying sign for the RBA is the persistent strength in underlying inflation.

The trimmed mean measure of core inflation ran at an annual 2.7 percent in July, a significant jump from 2.1 percent in June.

This suggests that price pressures are more deeply embedded than previously thought.

“Even so, the core measure, which strips out the noisy stuff, reminds us that service prices haven’t fully cooled and that inflation is still hovering a little above the comfort zone,” Sunny Kim Nguyen, head of Australian economics at Moody’s Analytics, told Reuters.

This puts the RBA, which cut rates for the third time this month, in a difficult position. The central bank is now forced to weigh this sticky inflation against a cooling, but still resilient, labor market.

“This inflation spike, combined with the recency of the last rate cut and continued strength of the labour market, reinforce our expectation that another rate cut is unlikely before November,” Reuters quoted Russel Chesler, head of investments and capital markets at VanEck.

The path forward: a bump or a detour?

The question now facing the market is whether this July jolt is a temporary bump in the road or a sign of a more treacherous path ahead.

The RBA itself has forecast that headline inflation will pick up in the coming months as the impact of rebates fades, but it expects core inflation to remain anchored.

However, the risk of a more prolonged battle with inflation is clearly rising.

“Our base remains that the RBA will continue to deliver three more rate cuts but the risks are tilted towards less easing,” concluded Marcel Thieliant, head of Asia-Pacific at Capital Economics, perfectly capturing the new mood of uncertainty that has descended on the Australian market.

The post An inflation ambush: Australia’s 2.8% price spike shatters rate-cut hopes appeared first on Invezz

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