Australian mortgage holders are on alert for potential interest rate increases following the release of July inflation data, which showed a higher-than-expected rate of 3.5%. The Australian Bureau of Statistics reported on Wednesday that headline inflation, as measured by the Consumer Price Index (CPI), decreased from 3.8% in the 12 months to June 2026 to 3.5% in the 12 months to July. This figure surpassed the 3.2% projection by many economists.
The primary drivers of the annual inflation were housing costs, which rose by 5%, followed by food and non-alcoholic beverages at 3.2%, and recreation and culture at 2.6%. The Reserve Bank of Australia's preferred inflation measure, the trimmed mean, remained unchanged at 0.8% for July and stood at 3.6% on an annual basis.
Concerns about inflation have been amplified by a significant pay increase for low-wage earners. Effective July 1, workers on award wages received a 4.75% pay raise. This could potentially inflate prices within the market services category, a component of the CPI that the Reserve Bank closely monitors due to its tendency to be less volatile than prices for items like fuel or travel.
Westpac economists Justin Smirk and Neha Sharma noted that domestic market services inflation might be stronger than anticipated. They cited the Fair Work Commission's wage decision, coupled with existing business pressures such as retail rents and utility costs, as factors that could contribute to higher inflation. "Domestic market services inflation may prove stronger than we have accounted for given the larger-than-expected minimum wage decision amid existing pressures for businesses including from retail rents and utilities," Smirk and Sharma stated.
Momentary discussions from the Reserve Bank of Australia's August board meeting, released Tuesday, highlighted board members' specific concerns regarding elevated market services inflation. The minutes suggested this could be a result of capacity constraints and the pass-through of increased costs, potentially linked to the conflict in the Middle East. The RBA had considered raising interest rates at its previous meeting, partly due to the risk that the Middle East conflict could keep oil prices high and lead businesses to pass more costs onto consumers.
Fuel costs are also anticipated to be a significant contributor to July's inflation figures. An increase in the fuel excise by 16 cents at the beginning of July, combined with higher oil prices attributed to renewed conflict in the Middle East, was forecast to cause automotive fuel prices to rise by 5.1%, a reversal from a 10.9% decrease in June, according to Smirk and Sharma.