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Australian inflation cools to 3.8%, easing rate hike fears

Annual inflation in Australia fell to 3.8% in June, below economists' forecasts of 4.1%, prompting major banks to reverse rate hike predictions. The data reduces but doesn't eliminate the chance of another RBA rate rise.

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Australian inflation cools to 3.8%, easing rate hike fears

Australian inflation cools to 3.8%, easing rate hike fears

The short answer

The Consumer Price Index (CPI) for June 2026 showed annual inflation at 3.8%, down from 4% in May and below the 4.1% expected. Core inflation (trimmed mean) held at 3.6%, still above the RBA's 2-3% target. As a result, markets now see an August rate hike as less likely. Both Westpac and AMP abandoned their forecasts of further hikes, though the RBA maintains a hawkish tone.

Why it's trending

The CPI release surprised markets with a larger-than-expected drop, causing a sudden shift in interest rate expectations. This triggered a flurry of financial commentary and live blogs, driving search interest for 'cpi' as Australians react to the potential impact on mortgage rates.

Australia's annual inflation rate eased to 3.8% in June, according to the latest Consumer Price Index (CPI) data. The figure was below both the previous month's 4.0% and economists' consensus forecast of 4.1%, providing some relief for households concerned about further interest rate rises. The trimmed mean measure of underlying inflation remained steady at 3.6%, still comfortably above the Reserve Bank of Australia's (RBA) target band of 2–3%.

Following the data release, market expectations for an August rate hike tumbled. Two of the big four banks – Westpac and AMP – reversed their earlier calls for further rate increases. Westpac chief economist Luci Ellis stated, 'We no longer expect rate hikes by the RBA this year,' citing more benign inflation. AMP echoed the sentiment but noted a potential hike in November if inflation picks up in the third quarter. However, RBA Governor Michele Bullock had warned just a day earlier that rate hikes may still be needed, emphasising that inflation remains too high.

The CPI data comes amid ongoing cost-of-living pressures and an economy that the RBA is trying to cool. The June figure marks a second consecutive monthly decline from a peak of 4.1% earlier in the year. Analysts warn that this is 'relief, not victory', with underlying inflation still above target and energy costs from the Middle East conflict posing upside risks. The RBA's next decision is due in August, with markets now pricing a higher probability of a hold.

For borrowers, the softer inflation print offers a temporary reprieve, but the RBA's hawkish communication suggests further tightening cannot be ruled out. The November meeting will be key, especially if third-quarter CPI data shows renewed price pressures. For now, the trend is encouraging, but the RBA is likely to remain cautious before declaring the battle against inflation won.

Timeline

  1. June CPI released

    Annual inflation falls to 3.8%, below forecasts of 4.1% and down from 4.0% the previous month. Trimmed mean steady at 3.6%.

  2. RBA governor warns of potential hike

    Michele Bullock signals that further rate rises may be needed, calling the economic slowdown 'part of the plan'.

  3. Market reaction and bank U-turns

    Westpac and AMP reverse their rate hike predictions after the CPI surprise. Markets scale back August hike expectations.

Questions people ask

What is the current inflation rate in Australia?

The CPI rose 3.8% in the 12 months to June 2026, according to the Australian Bureau of Statistics. The underlying trimmed mean measure was 3.6%.

Will the RBA raise rates in August?

The chance of an August rate hike fell sharply after the CPI data. Westpac and AMP no longer expect a hike, though the RBA hasn't ruled it out.

Why did Westpac change its forecast?

Westpac chief economist Luci Ellis said inflation was 'more benign than we feared' and the pass-through of higher energy costs had not continued, leading them to drop their call for two more rate hikes.

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