Statement on Monetary Policy – August 20252. Economic Conditions

2.1 Global economic conditions

Trade policy uncertainty has declined somewhat since the May Statement, but remains elevated; announced US tariff rates are higher than in May’s baseline case, though (as expected) retaliation has been limited.

The range of likely trade policy outcomes appears to have narrowed since April, which has contributed to some easing in measures of uncertainty and reduced concern among financial market participants about severe downside risks to the global economy materialising (see Chapter 1: Financial Conditions). Trade policy settings between the United States and China have been stable since the May Statement, and the United States has now reached agreements with many of its largest trading partners including the euro area, Japan, South Korea, the United Kingdom and Vietnam. Most bilateral agreements to date have included a US tariff rate of between 10 and 20 per cent, and the US administration has announced new tariff rates for countries without an agreement. So, while there continues to be uncertainty around the United States’ future trade policy settings, with agreements yet to be reached or finalised with some key trading partners, there is now greater clarity about where the US effective tariff rate is likely to settle.

The US effective tariff rate is higher than expected at the time of the May Statement, with most agreed tariff rates being above the 10 per cent baseline that applied broadly in April (Graph 2.1). For countries that have reached an agreement with the United States since the May Statement, or for whom a new tariff rate has been announced, tariff rates have generally been somewhat higher than was expected in May, at between 15 and 20 per cent. The introduction of sectoral tariffs on copper and an increase in the previously announced steel and aluminium tariffs, is also contributing to a higher-than-expected US effective tariff rate. That said, in recent weeks some sectoral tariffs have been narrowed in scope or lowered on a country-specific basis. The tariff rate applying to Australia is unchanged at 10 per cent, which we assess will have a limited direct impact on the Australian economy (Graph 2.2).¹

There has been limited retaliation from other countries so far in response to higher US tariff rates, as expected in May but in contrast with the 2018–2019 episode. Accordingly, while the effective US tariff rate is at its highest level since the 1930s, the global effective tariff rate has increased by much less – it is likely around its mid-2000s level.

Global trade remained resilient in the June quarter despite higher US tariffs and elevated uncertainty.

Higher US tariffs have affected some bilateral trade flows, but the impact on aggregate global trade flows has been limited so far (Graph 2.3). The ongoing resilience of global trade in the face of widespread US tariffs is largely due to rapid adjustments in global trading patterns and limited retaliation. US imports increased sharply in the first quarter of the year due to the front running of prospective US tariffs, but since then have only fallen back to 2024 levels. An increase in US imports from other east Asian economies has offset a decline in imports from China. Meanwhile, a decline in Chinese exports to the United States since the start of the year has been more than offset by an increase in exports to other countries, including higher exports to Europe and countries in east Asia (see Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?).

Chinese export prices have increased slightly since the start of the year but have tracked in a narrow range since mid-2024 (Graph 2.4). Limited movement in export prices is consistent with there having been little change in total demand for Chinese exports, despite the decline in Chinese exports to the United States following the imposition of higher tariffs.

US economic activity was resilient over the first half of the year, with the effects of tariffs and elevated uncertainty expected to become more evident in the second half of the year.

The increase in US tariff rates has had a modest impact on US inflation to date, with pass-through expected to increase over the second half of 2025 and into 2026. Measures of US inflation rose in June, with signs of modest pass-through to core goods inflation, particularly in tariff-exposed components such as toys and appliances (Graph 2.5). Pass-through is expected to increase over the year ahead as the earlier build-up of inventories, accumulated ahead of tariffs taking effect, are drawn down and businesses buy from other, potentially higher cost, foreign and domestic producers. The Federal Reserve’s Beige Book and regional Federal Reserve business surveys suggest that businesses are likely to substantially pass through higher tariff-related costs by the end of 2025. However, the extent and persistence of pass-through from higher tariffs to inflation remains uncertain and will depend on a range of factors including future trade policy settings, the ability of firms to absorb tariff costs into margins amid strong corporate profitability, and the extent to which exporters are able to cross-subsidise US exports across other markets.

There is little sign that policy uncertainty weighed significantly on US activity in the first half of the year, although there are signs that activity is starting to slow gradually. While the effect of uncertainty on activity was expected to take time to become evident, the resilience of US activity suggests that more severe downside outcomes for US activity are somewhat less likely. GDP growth increased in the June quarter, though it was boosted by a fall in imports as earlier tariff front-loading unwound. Domestic demand continued to grow at a solid, albeit slower, pace. The level of retail sales in real terms has also been little changed overall for the year to date, despite some volatility due to earlier front-loading of purchases by households. Nevertheless, looking through the volatility related to tariff front-running, US GDP growth has started to ease in recent quarters, and while survey measures of US business investment intentions and consumer confidence have picked up from recent lows, they remain below pre-tariff levels (Graph 2.6). There have also been consistent reports since May in the US Federal Reserve’s Beige Book that firms have deferred investment and hiring decisions. Recent data suggest a softening in the US labour market, with non-farm payrolls increasing by less than expected in July and earlier increases revised substantially lower. While the unemployment rate has been fairly stable at around 4.2 per cent in recent months, this has occurred alongside a gradual decline in the participation rate.

The new US budget Act – the One Big Beautiful Bill Act of 2025 – is expected to increase the federal government deficit over the next four years and, at the margin, support activity. The Act extends and expands existing tax cuts and increases funding for immigration enforcement and defence, while phasing out some government subsidies and implementing some spending cuts. Some key provisions of the Act had been widely anticipated by market economists, but it was overall viewed as providing a slightly larger near-term fiscal impulse, and implying a weaker long-term US fiscal position, than had been expected.

The additional fiscal impulse from the Act is expected to be substantially offset by the drag from tariffs via higher import prices. While tariff settings remain subject to ongoing trade negotiations between the United States and its trading partners, US tariff revenue has increased sharply, from an average of around $7 billion per month over 2024 to around $27 billion in June as the effective tariff rate has increased. These revenues are, however, small compared with the overall US fiscal deficit, which averaged close to $200 billion per month in 2024.

So far, changes in US trade policies appear to have had limited dampening effect on global activity, and little effect on global inflation – but that timing is broadly as expected, with a bigger impact anticipated in the second half of the year.

Domestic demand in the rest of the world has so far proven resilient to US tariffs and broader trade policy uncertainty. In advanced economies, retail sales have so far held up in real terms, despite measures of consumer sentiment remaining well below average. Business investment indicators have also remained resilient, and industrial production has been broadly stable over the year to date.

Across trade-exposed east Asian economies, activity and trade data have also been robust to US trade policy actions so far (Graph 2.7). Growth has moderated following the strong end to 2024 but has been steady over the first half of 2025. In China, which has been subject to the largest absolute tariff increase, and the most volatility in announced US tariff rates, external demand and domestic activity have been resilient, with GDP growth in the June quarter ticking down only slightly to 1.1 per cent, from 1.2 per cent in the March quarter. Fiscal policy in China has remained more supportive this year relative to last, and the authorities still have ample room in their budget for support to continue through the remainder of 2025.

Core measures of inflation across advanced economies other than the United States remain at or slightly above central bank targets (Graph 2.8). Services inflation has been persistent and elevated, and there is some indication that goods price inflation has moderated across economies that have not imposed retaliatory tariffs against the United States. Inflation in the euro area has remained around target, as domestic price pressures have eased alongside slower wages growth; lower energy prices over the year have also put downwards pressure on headline inflation outcomes across most advanced economies. In Canada, retaliatory tariffs on the United States contributed to stronger durable goods prices in June, with notable increases in vehicle and furniture prices. While they were not considered the most likely outcomes in May, there was a possibility that higher tariffs could have caused global export prices either to have significantly declined by now as trade flows were redirected or to have increased due to supply chain disruptions; these risks have not materialised so far.

2.2 Domestic economic activity

GDP growth was slightly weaker than expected in the March quarter, driven by an unanticipated decline in public expenditure, but the recovery in private demand was stronger than expected.

GDP growth was 0.2 per cent in the March quarter. This was slightly below our expectations in May, as public demand declined in the quarter (against expectations for continued strong growth). However, private demand growth was a little stronger than expected in the quarter, driven by upside surprises for business and dwelling investment. Combined with this stronger-than-expected quarterly outcome, upwards revisions to historical data for household consumption and dwelling investment suggest that the recovery in the private sector up to the March quarter was stronger than previously expected (Graph 2.9).

Recent GDP outcomes have contributed to further progress in closing the economy-wide output gap. While year-ended GDP growth picked up to 1.3 per cent, this remains below our view of potential output growth (see Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth).

Natural disasters affecting parts of Queensland and New South Wales appear to have weighed on aggregate growth modestly in the March quarter. Household consumption growth in Queensland was only a little below the national average after accounting for changes in electricity subsidies. Declines in spending associated with Cyclone Alfred, in categories such as hotels, cafes and restaurants, were short-lived and largely offset by increases in other categories such as food. However, there appears to have been a more pronounced effect on the external sector, as resource production fell significantly in the quarter, partly in response to weather-related mine disruptions in Queensland and New South Wales.

Growth in public demand has eased a little in recent quarters.

Overall public demand declined a little in the March quarter and was weaker than expected. Public consumption was flat in the quarter, reflecting a reduction in electricity subsidies and a slowing in spending growth on other general government expenses and federal social benefits, including health and disability benefits. Nevertheless, public consumption continues to account for a larger share of GDP than it has for most of the period since the 1960s, outside of the emergency pandemic period (Graph 2.10).

Government budgets imply continued growth in public consumption over the forecast period, albeit at lower rates than in the past couple of years as reforms to reduce the rate of increase of NDIS and aged care spending are assumed to take effect. All states and territories have released updated budgets since the May Statement and these have not materially changed our projections for future growth in public demand (see Chapter 3: Outlook).

The level of public investment has stabilised over the past year or so. New public investment declined in the March quarter, with the Australian Bureau of Statistics (ABS) noting that the decline reflected completions and delays in several major projects across energy, road, rail, health and education at the state level. In aggregate, state governments have revised down their projections for investment spending a little but continue to indicate large infrastructure pipelines over coming years.

Household consumption in the June quarter looks to have been broadly in line with the May Statement forecast. Over the past year, consumption has grown in line with population growth, leaving consumption per capita broadly flat.

Household consumption growth eased to 0.4 per cent in the March quarter, as expected. Year-ended growth was a touch stronger than expected at 0.7 per cent, due to an upward revision to the December quarter. Growth continued to be led by essential categories, although discretionary spending also increased over the year. Over the past year, overall household consumption has been growing in line with population growth, which has remained elevated: as a result, consumption has been little changed on a per capita basis (Graph 2.11). That is the case even after abstracting from a range of factors affecting measured growth in recent quarters – including changes to electricity subsidies, increases in promotional activity in the December quarter, and the effect of weather events.

Timely indicators of household consumption for the June quarter to date have been in line with the assessment in the May Statement. Consumption growth is expected to pick up from the March quarter. Promotional activity around the end of the financial year supported growth in the quarter, and essential consumption is expected to continue contributing to growth, including through the unwinding of electricity subsidies. Overall, the recent data are consistent with retail liaison contacts continuing to report moderate growth since the start of this year (see Box B: Insights from Liaison). The expected June quarter outcome would be consistent with a small increase in household consumption per capita.

Real household incomes increased by 1.7 per cent over the year to the March quarter on a per capita basis; the household sector has largely used this higher income to increase saving (Graph 2.12). The household savings ratio increased in the March quarter to around its pre-pandemic average. While this was partly a continuation of a gradual increase over the preceding year and a half, there was also a temporary boost to income and saving in the March quarter from a large pick-up in social assistance and insurance transfers related to weather damage, which is expected to unwind in the June quarter. An increase in savings is consistent with an environment of higher interest rates, which increases the incentive to save. Nonetheless, the return of the saving ratio to its pre-pandemic average has occurred more quickly than expected, resulting in weaker consumption outcomes than were expected a year ago. The underlying cause of these outcomes is difficult to determine but it could reflect an increase in precautionary savings motives as the persistence of weakness in real income growth has become more apparent over time.²

After easing over 2024, housing market conditions have begun to pick up.

Dwelling investment picked up in the March quarter and was stronger than expected in the May Statement. The pick-up was broadly based across high density dwellings, detached dwellings and alterations and additions (Graph 2.13). The overall upside surprise – combined with an upwards revision to previous data – points to a clearer upward trend in residential construction activity than previously observed. This upwards trend reflects construction work resulting from the pick-up in building approvals over the first half of 2024, which was in turn driven by easing cost inflation and build times, strong population growth, improved sentiment (as buyers believed the cash rate had peaked), and state-level housing initiatives for developers. Dwelling investment has also been supported recently by continued work on projects in the pipeline as capacity constraints have eased and trade labour availability has improved. Despite recent strength, dwelling investment and leading indicators such as building approvals remain low in per capita terms, and relative to underlying housing demand.

Housing price growth and established housing market activity have picked up in recent months (Graph 2.14). After a period of subdued growth from the second half of 2024 into early 2025, housing price growth has been a bit stronger than expected in the May Statement, consistent with the modest pick-up in housing credit growth (see Chapter 1: Financial Conditions). Auction clearance rates, which can be a leading indicator for housing price growth, have trended a little higher since the start of the year to be slightly above historical averages. On-market supply remains tight, with total listings of homes for sale declining in Sydney and Melbourne in recent months and remaining on the lower end of recent historical ranges for other large capital cities.

These developments collectively suggest that the established housing market is responding to the easing in monetary policy. So far, growth in housing prices since the first reduction in the cash rate in February has been within the range of historical experiences of previous easing phases. Future growth will depend on the evolution of other macroeconomic variables (notably the unemployment rate), how actual and expected monetary conditions evolve, and underlying demand and supply in the housing market. Building approvals are yet to respond noticeably to the recent cash rate cuts, although other leading indicators of supply such as enquiries for new homes have started to pick up. Underlying demand has continued to rise alongside continued growth in the population, although this has been partly offset by a pick-up in average household size, which has risen to pre-pandemic levels (Graph 2.15).

International developments appear to be having little effect on private activity in Australia so far, as had been expected at this stage, and forward-looking measures of sentiment so far show no signs of deteriorating on international news.

Timely readings of current conditions from consumer surveys suggest that global trade tensions have had little effect on consumer sentiment in Australia. Measures of public commentary about economic policy uncertainty – which increased sharply alongside recent global developments – have fallen back somewhat in both Australia and the United States from their peak in April (Graph 2.16). While there has been little recovery in consumer sentiment since the start of the year, survey responses continue to suggest that domestic issues – such as inflation and interest rates – are most salient for households.

Business surveys also continue to point to domestic factors shaping conditions more than international factors. Though surveyed business conditions have been mixed, conditions improved in the June month after a period of steady declines since mid-2022, which may be an early indication of business conditions stabilising, if not improving. Nominal capital expenditure intentions for the 2025/26 financial year were revised down in March and suggest there will be no growth in business investment over the year, compared with previous expectations for growth of around 3 per cent. As with consumers, domestic factors appear to be the primary driver of the business investment outlook, with few businesses calling out global factors at present. The May Statement forecasts for business investment assumed there would be a small effect from heightened global uncertainty from the second half of this year, but the evidence for such an effect is limited based on currently available data.

Global trade policy developments have also had few discernible effects on export volumes, as expected. While resource export volumes are estimated to have declined in the June quarter due to lower coal exports, this mostly reflects disruptions associated with weather events and lower demand from Asian markets due to milder weather conditions. Tariff announcements have caused some price volatility for key export commodities, but have generally not had a sustained effect, with other factors like global supply and Chinese demand being the more important drivers (see section 2.1 Global economic conditions). Looking forward, slowing global growth because of global trade policy developments will likely result in reduced demand for Australian exports. But the effect is more likely to come through export prices than volumes given that Australia’s exports are dominated by resources for which Australia is a relatively low-cost producer, and in any case Chinese fiscal policy is expected to provide offsetting support. Other structural forces, like changes in global supply or declining use of fossil fuels in energy generation globally, are instead expected to drive trends in resource export volumes.

There is early evidence that global developments have had a modest effect on Australian imports. In particular, the value of goods imports from China increased sharply in the June quarter, broadly similar to other advanced economies. This could reflect some possible reorientation and redirection of Chinese trade flows. It is too early to observe clear evidence of whether changing trade flows have affected Australian import prices, although any effect on overall import prices is expected to be limited (see Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?).

2.3 Labour market and wages

Labour market conditions have eased a little in recent months and are evolving broadly as expected at the time of the May Statement.

The unemployment rate increased to 4.3 per cent in the month of June, its highest level since late 2021 (Graph 2.17). For the June quarter as a whole, the unemployment rate averaged 4.2 per cent, in line with our May Statement forecast. The increase in the unemployment rate in June was partly driven by a rise in the youth unemployment rate – a more cyclical measure – to 10.4 per cent. The medium-term unemployment rate also ticked up in June. Other measures of labour underutilisation have been broadly stable in recent months. The underemployment rate ticked up to be 6.0 per cent in June but has been little changed since late 2024. The hours-based underutilisation rate – a broader measure of spare capacity – has been little changed since the start of the year. The rate of layoffs, which began increasing in 2022, has stabilised over the past year at a relatively low level by historical standards. The rate of job-switching had been easing more rapidly than other labour market indicators, having fallen quite materially since its 2022 peak, but this measure has also stabilised since the start of the year.

Employment growth was solid in the June quarter despite the tick-up in unemployment. The 0.6 per cent increase in employment over the quarter was largely accounted for by strong gains in April, with momentum moderating in May and June. The non-market sector – which includes health care, education and public administration – has been the main driver of aggregate employment growth for some time (based on industry-level data to March quarter 2025), though employment growth in this sector has moderated from a rapid pace. Employment growth in the market sector picked up a little in year-ended terms in the March quarter, consistent with the gradual pick-up in GDP growth (Graph 2.18). The whole-economy employment-to-population ratio and participation rate were little changed in June, remaining around historical highs. The longer run trend of higher female participation and strong demand for labour in the non-market sector in recent years have continued to support recent participation rate outcomes.

With the unemployment rate increasing somewhat and many other indicators stable, labour market conditions overall are judged to have eased a little recently – but leading indicators point to a stable near-term outlook. Measures of labour demand such as job advertisements and vacancies have mostly tracked sideways in recent months, and employment intentions from business surveys and the RBA’s liaison program have been relatively stable (Graph 2.19). Households’ unemployment expectations have also remained broadly unchanged since the start of the year.

As discussed in the May Statement, year-ended growth in nominal wages eased over the year to the March quarter.

The most recent Wage Price Index (WPI) data were released ahead of the May Statement. While wages growth had eased over the preceding year, it ticked up slightly to 3.4 per cent in the March quarter. This largely reflected administered increases to the wages of childcare and aged care workers. Looking through the effects of administered wage decisions, growth in the private sector WPI was little changed in the March quarter but was lower than a year earlier. Wages growth eased for workers paid under individual arrangements, whose wages tend to be the most reflective of conditions in the labour market (Graph 2.20). Public sector wages growth – which has been volatile recently – increased in the March quarter, supported by the certification of several large agreements.

In its annual wage review, the Fair Work Commission announced a 3.5 per cent increase to all modern award wages. The increase was effective from 1 July and directly affected the approximately 20 per cent of employees that are paid under a modern award, or about 10 per cent of the wage bill. A further 5 to 10 per cent of employees are estimated to be indirectly affected through agreements that are linked to the award rate. The wage increase has not materially affected the outlook for aggregate WPI growth (see Chapter 3: Outlook).

Unit labour costs growth remained high in the March quarter, largely because of persistent weakness in productivity growth.

Year-ended growth in the national accounts measure of average earnings (AENA) per hour increased slightly to 4.2 per cent in the March quarter. This was as expected in the May Statement and slightly above its historical average. AENA is a broader measure of labour earnings than the WPI and includes changes in bonuses, overtime and other payments, as well as the impact of workers moving to jobs with different levels of pay. This broader measure of earnings has continued to grow more strongly than the WPI, with the gap between growth in AENA and WPI slightly above its historical average.

Unit labour costs growth remained elevated in the March quarter, broadly as expected, owing to persistently weak productivity outcomes and slightly above-average growth in labour costs. Growth in non-farm unit labour costs picked up to 5.6 per cent over the year to the March quarter. Estimates of unit labour cost growth remain elevated even after excluding various industries (Graph 2.21). For example, growth in unit labour costs is above average when excluding the non-market sector, for which productivity is difficult to measure and which may have limited immediate impact on consumer prices. Over the forecast period, growth in unit labour costs is assumed to return to sustainable rates through a combination of a further easing in labour costs growth and an increase in productivity growth (see Chapter 3: Outlook).

Productivity growth remains weak, weighing on the growth of the economy’s supply capacity.

Non-farm labour productivity decreased by 1.3 per cent over the year to the March quarter, and labour productivity is around its 2016 level. Productivity growth in the market sector (excluding agriculture and mining) increased by 0.4 per cent over the year to March 2025. The earlier recovery in the stock of capital relative to the number of hours worked (the capital-to-labour ratio) has stalled in recent quarters. Multifactor productivity (MFP), which is the part of labour productivity growth not due to changes in the capital-to-labour ratio but reflecting how efficiently inputs are being used, remained very weak; MFP declined by 1.3 per cent over the year to the March quarter (Graph 2.22).³

2.4 Assessment of spare capacity

Overall, while conditions have eased a little recently, we assess that there remains some tightness in the labour market and some evidence of broader capacity pressures; as usual, this assessment is uncertain.

Some indicators suggest that labour market conditions have moved closer to balance recently, though overall we judge that some tightness remains. The unemployment rate has increased since the start of the year, reflecting underlying increases in medium-term and youth unemployment, and the share of firms reporting that labour is a significant constraint on output has declined a little recently (Graph 2.23). Nevertheless, unemployment is trending a little below our current estimate of its full employment level, the underemployment rate is little changed at around its historical low and the ratio of vacancies to unemployed workers and the share of firms reporting labour as a­ significant constraint on output remain above their long-run averages. Elevated growth in unit labour costs is also consistent with there being some tightness in the labour market, although this measure of labour costs, while comprehensive, is volatile and subject to considerable revision. Overall, these indicators suggest that labour market conditions have eased recently but that some tightness remains relative to full employment.

The rate of job-switching is around its long-run average, suggesting less tight labour market conditions. A decline in the rate of job-switching over recent years (notwithstanding a small pick-up recently) suggests that inter-firm competition to attract and retain staff may have eased. That in turn could indicate less upward pressure on wages – and less tightness in the labour market – than implied by other indicators. That possibility continues to be reflected in downwards judgements on our wages and inflation forecasts (see Key judgement #3 in Chapter 3: Outlook).

Model-based estimates continue to point to a somewhat tighter labour market than suggested by other indicators, though these estimates are imprecise. Model-based estimates of spare capacity in the labour market have remained broadly stable since mid-2024 (Graph 2.24). The estimates in our model suite vary widely, but each implies that the labour market is tighter than full employment – though there is substantial estimation uncertainty around each individual estimate.

Indicators of broader capacity utilisation continue to suggest that some resources are being used intensively. The earlier easing in the NAB measure of capacity utilisation appears to have stalled since February and it remains above its historical average, suggesting businesses are still using their labour and capital resources at higher-than-normal rates to meet demand (Graph 2.25). Residential vacancies data show utilisation of the housing stock remains elevated, consistent with subdued growth in housing supply over recent years. Retail vacancies data suggest utilisation of retail property has returned to its historical average, supported by the return to office and growing demand from premium retailers for space as a result.

Taking survey evidence together with model-based estimates of the output gap, we assess that the output gap is small and positive, though there are material uncertainties around this assessment. The level of GDP in the March quarter remained higher than most model estimates of the level of potential output, suggesting that aggregate demand continued to exceed the capacity of the economy to supply goods and services sustainably (Graph 2.26). However, the individual model estimates vary widely, reflecting differences in how they interpret the data, and each is subject to significant estimation uncertainty. The estimates suggest that the output gap continued to narrow in the March quarter. Weak productivity growth outcomes have continued to weigh on estimates of the current rate of potential output growth. We have revised down our medium-term assumptions for productivity growth and potential output growth, though this is assumed to have no implications for our assessment of the output gap (see Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth).

2.5 Inflation

The quarterly rate of underlying inflation eased further in the June quarter, broadly in line with expectations in the May Statement.

Trimmed mean inflation eased to 2.7 per cent over the year to the June quarter, from 2.9 per cent in the March quarter, broadly as expected in the May Statement (Graph 2.27). In quarterly terms, trimmed mean inflation eased to 0.6 per cent, from 0.7 per cent in the March quarter.

Some components experienced stronger-than-expected inflation in the June quarter. New dwelling inflation picked up alongside an increase in housing market activity; this follows declining prices over the previous two quarters and elevated discounting by builders. Consumer durables inflation has picked up in recent months, with some firms in liaison indicating that the depreciation of the exchange rate late last year is being passed through to consumer prices.

Offsetting these were downside surprises to domestic travel and some administered services, although these components tend to be volatile. Market services inflation continued to ease in year-ended terms, as expected in the May Statement. Non-labour cost pressures have continued to ease gradually in recent months. Downward pressure on some firms’ margins may still be weighing on inflation at present, with some firms reporting in liaison that weak demand has limited their ability to pass increases in input costs to final prices.

Headline inflation eased to 2.1 per cent over the year to the June quarter, broadly as expected in the May Statement. Headline inflation was well below underlying inflation over the year to June, primarily reflecting large declines in electricity and fuel prices over the past year and the effect of federal and state government subsidies. Temporary changes to electricity rebates are estimated to have subtracted around 0.2 percentage points from headline inflation over the year to the June quarter. The unwinding of rebates, as scheduled, is expected to increase year-ended headline inflation from late 2025. Notwithstanding the recent volatility in global oil markets, oil price declines in early April resulted in lower fuel prices through April and May, subtracting around 0.1 percentage points from headline inflation in the June quarter.

Housing inflation eased in the June quarter, but by less than expected in the May Statement.

New dwelling construction prices increased by 0.4 per cent in the June quarter, after declining over the previous two quarters (Graph 2.28). This was stronger than expected at the time of the May Statement. New dwelling inflation had been an important contributor to the moderation in underlying inflation over the past year, having eased to 0.7 per cent in year-ended terms from previously elevated growth rates. Information from liaison indicates that demand for building new houses has picked up in recent months alongside improved buyer sentiment. The availability of trade labour has improved a little further and growth in materials costs is a little below its historical average rate.

CPI rent inflation eased to 4.5 per cent over the year to the June quarter, in line with expectations and consistent with the earlier slowing in advertised rents growth. Advertised rents growth has picked up in recent months in capital cities, suggesting that year-ended growth in advertised rents is unlikely to ease materially further in coming quarters (Graph 2.29).

Services inflation moderated further in the June quarter in year-ended terms.

Market services inflation (excluding domestic travel and telecommunications) eased to 3.1 per cent over the year to the June quarter, as expected, from 3.5 per cent in the March quarter. The disinflation in year-ended terms has been broadly based and has seen the rate of market services inflation decline to around its inflation-targeting average (Graph 2.30). Insurance inflation (excluding health insurance) has eased notably in recent quarters.

Inflation for goods and services with administered prices (excluding utilities) was broadly stable in year-ended terms. At 4.1 per cent in the June quarter, it was around its historical average. Cost-of-living policies continue to place downward pressure on the year-ended rate of administered price inflation.

Goods inflation has been broadly stable over the past year; it is too early to see any effects of recent international trade policy developments.

Retail goods inflation was broadly stable in the June quarter at 1.6 per cent in year-ended terms (Graph 2.31). Consumer durables inflation increased in the June quarter and was stronger than expected in the May Statement. Information from liaison suggests that stronger inflation in some components may reflect the pass-through from the depreciation of the exchange rate late last year. Global trade developments do not appear to be having a material impact on domestic prices in the data received to date (see Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?). Groceries inflation, excluding fruit and vegetables, slowed a little in the June quarter. Idiosyncratic factors have affected a handful of components, including eggs and confectionary.

Inflation expectations remain consistent with achieving the inflation target.

Survey and financial market measures of long-term inflation expectations have declined from their mid-2022 peaks, consistent with declines in actual inflation. Financial market measures of inflation compensation declined earlier in the year, although this may have partially reflected market dynamics unrelated to fundamentals, and have been stable in recent months (Graph 2.32). Unions’ long-term inflation expectations have also declined to be close to the mid-point of the inflation target range. Our assessment is that long-term inflation expectations remain anchored at the target.

The monthly CPI will commence later this year.

The ABS has announced that it will start publishing the complete monthly CPI in November 2025, and will discontinue the monthly Indicator data at the same time. The ABS will also continue to publish quarterly seasonally adjusted data for at least 18 months, and the RBA plans to observe both the quarterly and monthly data for a period. More information on the RBA’s approach will be provided in the November Statement, ahead of the first data release to be published later that month.

Endnotes

See RBA (2025), ‘Box A: How Might Tariffs Affect Australian Trade?’, Statement on Monetary Policy, May. 1

See RBA (2025), ‘Box B: Consumption and Income Since the Pandemic’, Statement on Monetary Policy, February. 2

For more information on the labour productivity decomposition, see RBA (undated), ‘Productivity’, Explainer. 3