Australia's consumer inflation remains persistently high, continuing to put pressure on households and the broader economy.
In this client-friendly update, Senior Economist Bob Cunneen explains why borrowers and investors should be prepared for the possibility of another interest rate rise later this year.
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The key points are:
Falling real wages and a surge in tax and interest payments over the last five years have led to a slump in Australians’ living standards.
But a broader driver of the malaise in living standards has been a slump in productivity growth from over 2% pa in the 1990s to near zero since 2016.
Amongst other things this has led to a worse growth/inflation trade-off than was the case prior to the pandemic and higher than otherwise RBA interest rates.
Key policies to boost productivity growth include: tax reform; reducing the size of the public sector; deregulation; greater incentives to invest; and competition reforms.
The key points are:
While we saw a long list of worries over the last year, 2025-26 saw another financial year of strong investment returns.
Risks around Iran and oil, various other geopolitical issues, sticky inflation and possible further rate hikes and AI related bubble worries could drive another correction in shares.
In Australia, the main risks relate to sticky inflation, RBA rate hikes and the property downturn.
However, with recession looking unlikely, profits likely to keep rising and the Fed and RBA likely to be cutting rates in 2027, investment returns are likely to be reasonable over the year ahead but maybe a bit slower than those of the last four years.
The key for investors including super fund members is to maintain a long-term strategy and turn down the noise.
The key points are:
Angst about economic conditions has been running high in recent times. This is evident in chronically low consumer confidence readings and a downtrend in measures of happiness. It’s also arguably evident in the rise of populist parties globally and more recently in Australia.
There is no doubt that some things were better a generation or two ago. Cheaper housing stands out. But most indicators are far superior today.
That said there is no denying that “cost-of-living pressures” have been a problem in recent years and a key driver behind this has been poor productivity growth. Unfortunately, there are no quick and easy fixes to this.
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The key points are:
Despite lots of threats over the last 18 months share markets have proved to be remarkably resilient.
This likely reflects a combination of: President Trump’s desire for shares to rise; economic activity data right here right now has been okay; earnings growth has been helped by the AI spending boom; the global economy is awash in excess capital looking for a home; and policy makers have become more assertive in protecting their economies.
However, there is a danger in getting too swept along in positive market sentiment: the Iran War could flare up again; Trump will be less constrained after the mid-term elections; there is a risk that the AI boom is morphing into a bubble; inflation is proving sticky with global central banks starting to hike rates; & share market volatility is at the low end of its normal range which can be a sign of rising risk.
So, while the strong share run could continue for a while yet investors should resist the temptation to take on more risk.
The key points are:
The three hikes which took monetary policy to slightly tight provided space for the RBA to pause and assess the response with signs that the economy is slowing as expected.
However, the RBA retained a tightening bias noting that inflation Is “still too high” and is likely to remain so for some time and that it will do whatever is necessary to achieve its mandate, “including increasing the cash rate further if required”, but with no reference to cutting it.
We are continuing to allow for a further rate hike in August and have another one pencilled in for November reflecting the still rising trend in underlying inflation and risks that it will take longer to bring it back under control.
The US/Iran peace deal likely heads off a worst-case scenario in terms of a further hit to inflation and growth – but the RBA is likely to remain wary of the second-round flow through to inflation from still high oil prices and the oil supply disruption that “will take some time to resolve”.
The Budget did little to alleviate near term pressure on inflation from high levels of government spending adding to demand, instead locking in Federal spending just below 27% of GDP which is well above pre pandemic norms. Any further cost of living stimulus will only add to inflationary pressure.
The key points are:
National average home prices were flat in May according to Cotality, the weakest since January last year. Prices fell further in Sydney and Melbourne, and the boom time cities of Brisbane, Adelaide and Perth are seeing growth slow.
The housing shortage and expanded 5% deposit scheme are being offset by rate hikes, low confidence & the Budget tax hikes on investors with a further fall in prices likely.
We now expect national average property prices to fall around 1% this year (revised from around 3% growth) and to fall around 5% over 2026-27.
Units and lower end property are likely to hold up better due to the expanded FHB 5% low deposit scheme. The tax changes also favour properties with higher rental yields.
The combination of a rising long-term trend in rates, poor affordability, the tightening of property tax concessions and a political shift towards lower immigration may mean the 30-year super cycle upswing in prices may be close to over. The housing shortage remains the key sticking point though.
Asking rents rose 0.6% in May, with annual growth rising to 5.9%yoy as vacancy rates remain low. This is not good for inflation.
The key points are:
The combination of the natural human tendency to focus on bad news, expectations rising beyond the ability of the economy to deliver, the increased availability of information & the rise of social media are likely magnifying perceptions around worries and making it easier to be gloomy.
However, to succeed as an investor it makes sense to err on the side of cautious optimism: otherwise, there is no point in investing; growth assets like shares have trended up over the long term; and trying to get the timing right of the 2 or 3 years out of 10 when they fall can be very hard.
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The key points are:
The oil supply shock remains a significant threat to economic growth and shares – particularly with the Strait of Hormuz remaining closed and oil reserves running down.
It’s contributing to rising bond yields and putting pressure on share market valuations.
The tax changes in the Budget will make shares and super relatively more attractive investments and favour high yielding over growth investments (ie, less risk taking).
The Budget contains good moves to deregulate, but little real tax reform with public spending remaining too high.
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How much should I save?
Save what you can consistently, even if it starts small. Regular contributions add up over time.
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The key points are:
The RBA hiked its cash rate for the third time this year by another 0.25% to 4.35% in response to inflation running above target and concerns that it will likely remain so for longer given price pressures partly flowing from the War with Iran, threatening higher inflation expectations.
The key lesson from the 1970s is that the RBA is right to be focussing first on getting inflation back to target – as it will avoid even more pain down the track.
We are allowing for a further rate hike in August, but the longer the Strait of Hormuz remains blocked the greater the risk of recession allowing a return to rate cuts next year.
The best things the Government can do in the Budget to help alleviate underlying inflation pressures is to lower the level of public spending and boost productivity.
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The key points are:
The upcoming Budget is an ideal opportunity to reframe government policy to put the economy onto a stronger path. The latest global crisis adds to the case for this.
The five key things the Budget needs to do are: limit any “cost-of-living” relief; cut government spending over four years; undertake serious tax reform and not just tax hikes; significant productivity enhancing reforms like less red tape & more incentives to invest; and reform the Charter of Budget Honesty.
The key points are:
Uncertainty remains high over the US/Iran War with a ceasefire declared but no agreement in talks so far. Tensions continue to remain high and oil flows remain restricted, with Trump announcing his own blockade on the Strait of Hormuz. But pressure on Trump to back down on the War is very high.
A stagflationary hit of higher inflation and weaker growth is now baked in with the uncertainty being how long it’s sustained. The flow of ships through the Strait of Hormuz remains the key - as it has been since day one of the War.
Beyond the near term uncertainty, there are likely to be nine key longer term consequences of the War: higher prices and inflation; escalated geopolitical risk; a renewed global terrorist threat; increased defence spending; increased spending on oil and gas infrastructure; increased focus on renewables and nuclear energy; more pressure to onshore supply chains; yet another reminder that the world is now more crisis prone; and bigger government and more public debt.
This is all flowing from and reinforcing the rise of populism. Over the long term this risks weaker growth, more inflation prone economies and more volatility which should mean higher risk premiums and risks lower investment returns.
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