Statement on Monetary Policy – November 20252. Economic Conditions

2.1 Global economic conditions

Growth in Australia’s major trading partners was stronger than expected in the June quarter. Trade patterns have adjusted rapidly to higher tariffs, and global merchandise trade has remained resilient in the September quarter. However, elevated uncertainty and high tariffs are expected to weigh on global growth in the second half of the year. In China, GDP growth in the September quarter was stronger than expected at the time of the August Statement, though domestic demand was weaker, particularly investment. Authorities have responded with fiscal stimulus that will support infrastructure investment over the remainder of the year and into 2026. Iron ore and coking coal prices have increased a little, supported by resilient underlying demand from Chinese steel mills and the announced stimulus. In the United States, partial indicators suggest that growth in economic activity remained steady in the September quarter, though the labour market has weakened.

Higher US tariff rates came into effect in early August, but uncertainty remains over the timing and size of the macroeconomic effects.

The average effective US tariff rate is little changed since the August Statement. Higher country-specific tariff rates have been in effect for most US trading partners since 7 August. Prior to this, most faced a lower baseline tariff rate of 10 per cent, which had remained in place following the pause and subsequent delay of tariff rates announced in early April. Uncertainty around the final configuration of tariffs remains, including as the legality of the new tariff regime will be tested in the US Supreme Court. Trade tensions between China and the United States, as well as between Canada and the United States, have fluctuated in recent weeks. In early October, the US administration announced additional sectoral tariffs covering, among other things, pharmaceuticals, trucks and lumber. In late October, the United States reached trade agreements with a number of its Asian trading partners, with US tariffs on those countries remaining around their prevailing rates of between 15–20 per cent.

There continues to be uncertainty around the timing and impact of recent increases in US tariff rates on macroeconomic outcomes, as well as the effect of any broader policy uncertainty. Global economic activity has been more resilient than expected through the year so far, owing in part to the front-loading of trade, manufacturing activity and inventory management ahead of the introduction of tariffs. Tariffs are expected to weigh more on activity in late 2025 and early 2026.

Global merchandise trade looks to have remained resilient in the September quarter, as trade patterns continue to shift in response to higher US tariffs.

Global merchandise exports remain at high levels as country trade flows have adjusted relatively quickly to higher US tariff rates and with little evidence of supply chain disruptions. Trade flows in the June quarter across Asia were particularly robust, likely owing to trade redirection and diversion, as well as the pull forward of activity ahead of further tariff increases in early August (Graph 2.1). More recently, there have been signs of slowing in the merchandise trade data for August, but exports across east Asia remain at elevated levels compared with the beginning of the year and initial exports data for Vietnam and South Korea suggest a rebound in September.

US import shares have adjusted in favour of lower tariff economies. The share of US imports from China has declined sharply since the start of the year, shifting mainly towards other countries in Asia with lower tariffs, and to a lesser extent Europe. There has been limited evidence of substantial transshipment activity from China to the United States via other economies in response to higher tariffs this year; while some Asian trading partners have seen the share of their goods imported from China increase, this is largely the continuation of a longer running trend.

While China’s exports to the United States have continued to decline, Chinese exports overall remain elevated as trade has been redirected to alternative markets. Exports to high-income east Asia, the European Union, the United Kingdom and Africa have increased since the August Statement. The increase has been driven by high-technology goods, consistent with China’s increasing exports of these products in recent years. The effect of US tariffs has reinforced these existing trends.

Chinese export prices decreased over recent months, after showing signs of stabilising earlier in the year, contributing to a decline in world export prices. The recent outcomes for Chinese export prices suggest that the trend decline over recent years (reflecting increasing productive capacity) may have resumed, as the boost to demand earlier in the year from export front-loading fades. Moreover, the data reinforce our earlier key judgements – discussed in the May and August Statements – that global trade developments will be mildly disinflationary for Australia.

In China, domestic economic activity growth has softened, but net exports have continued to support GDP growth.

Domestic economic activity in China weakened in the September quarter, led by a broad-based slowdown in investment across the manufacturing, infrastructure and real estate sectors (Graph 2.2; Graph 2.3). There are several plausible sector-specific explanations, including the delayed impact from higher tariff uncertainty and the direct effect of tariffs themselves reducing the anticipated returns from new investment. A recent strengthening in the authorities’ resolve to curb excess capacity and address below-cost pricing in certain sectors may also have contributed to weaker manufacturing investment. Additionally, local government financial constraints may have weighed on infrastructure investment in the quarter. Declines in real estate investment and new housing prices have accelerated in recent months, which may reflect some similar factors to those driving weakness in broader investment, such as elevated economic uncertainty.

Despite weak investment, real GDP growth was stronger than expected in the September quarter, supported by a strong net exports contribution. Consumption also made a stable contribution to growth in the September quarter, despite retail sales weakening in the quarter in part because of the diminishing support from government subsidies earlier in the year. Industrial production accelerated in the month of September, driven by sectors such as automotive production, where investment has also remained robust. However, nominal GDP has continued to grow at a slower pace than real GDP as inflation has remained well below the authorities’ target, consistent with the economy having excess supply capacity.

Authorities have announced stimulus measures in response to the slowdown in investment. RMB500 billion will be made available for China’s policy banks to deploy in eight areas, including artificial intelligence, digital infrastructure and more steel-intensive forms of infrastructure like transportation and industrial parks. The funding tool will provide capital for projects and is expected to mobilise further loans from other sources, with some market analysts expecting the program could drive around RMB1.5 trillion in investment, equivalent to around 1 per cent of GDP. The funds will be deployed from the December quarter 2025 onwards to support growth through the remainder of the year and into 2026 (see Chapter 1: Financial Conditions).

Iron ore and coking coal prices have increased a little in recent months despite weak investment in China. As in recent years, demand from Chinese steel mills has remained robust despite declining domestic demand particularly for construction steel. Steel production exceeding domestic demand has led to declining domestic steel prices and mill profit margins, and a significant increase in steel exports since the decline in property investment began in late 2021. Unlike in 2015, when steel prices and mill profitability were also weak, the central government has so far refrained from publicly announcing measures to reduce capacity. Expectations for, and the subsequent announcement of, incremental fiscal stimulus in China have also supported iron ore prices recently. Oil prices have declined since the August Statement, alongside increased expectations that global supply will exceed demand over the next year and signs of easing in geopolitical tensions in the Middle East. Oil prices partially retraced their decline in late October following the announcement of new US sanctions on Russian oil producers.

US growth was stronger than expected in the first half of the year; more recently, the government shutdown has disrupted the production of official data, making it harder to assess conditions.

Growth in domestic activity in the United States was stronger than expected in the first half of 2025, as tariffs were announced and uncertainty increased sharply, but was notably slower than in the second half of 2024. In the June quarter, GDP growth was revised higher, largely due to an upward revision to growth in consumer spending on services. Private business investment grew at a solid rate over the first half of the year, primarily driven by strong growth in technology and AI-related investments.

The recent US Government shutdown is expected to have only a modest effect on economic activity, though it has disrupted the publication of some official statistics, making it more difficult to assess recent economic momentum. The recent flow of partial indicators (such as monthly consumer spending, new home sales and core capital goods orders) and business surveys (such as purchasing managers’ indices and regional Federal Reserve surveys of firms’ capital expenditure expectations) suggest that economic activity remained resilient in the September quarter (Graph 2.4). That said, the Federal Reserve’s Beige Book has pointed to some slowing in activity, and households have also become slightly more pessimistic about current economic conditions since August.

US labour market conditions have weakened somewhat.

The US labour market has shown clear signs of slowing in recent months, and policymakers have emphasised downside risks. Data received prior to the US Government shutdown showed that employment growth had slowed significantly, and alternative labour market indicators suggest it continued to slow in September. Both demand and supply factors are likely to have contributed to this slowing. US population growth has slowed substantially alongside the US administration’s focus on immigration. Labour demand has also eased – vacancies and the job hiring rate have both declined in recent months and employment intentions across a range of measures remain weak. The unemployment rate, which provides one indication of the overall balance of demand and supply in the labour market, ticked up only slightly in August and has otherwise tracked broadly sideways since the start of the year.

In other advanced economies, GDP growth remains subdued and labour market conditions have continued to ease.

GDP growth has remained below its pre-pandemic averages across many advanced economies, though tariff-related front-running effects and their unwinding continue to make underlying momentum in economic activity difficult to assess (Graph 2.5). GDP growth contracted in Canada, New Zealand, Germany and Italy in the June quarter. Consistent with overall subdued conditions, unemployment rates have increased (or remain elevated) in most advanced economies. A number of advanced economy central banks have recently eased monetary policy in response to economic weakness including in labour markets (see Chapter 1: Financial Conditions).

Headline inflation in many advanced economies remains at or slightly above targets.

Services inflation has remained elevated in many advanced economies (Graph 2.6). While the drivers of services inflation vary across economies, key contributors have included elevated housing inflation and only moderate easing in wages growth – despite weaker labour market conditions in a number of economies. Central banks in advanced economies with above-target inflation expect the disinflation process to continue, owing to labour market softness and weakness in domestic demand (see Chapter 1: Financial Conditions).

US inflation has evolved broadly as expected in recent months, with early signs of tariff-related pass-through evident and further pass-through expected over late 2025 and 2026. Higher onshore import costs have started to pass through to both CPI and Personal Consumption Expenditure (PCE) inflation, with both indicators increasing over recent months (Graph 2.7). Recent increases in trade-exposed components of goods inflation – across both consumer and producer prices – point to early signs that higher tariff rates and cost pressures from substitution toward higher cost Asian and European suppliers are beginning to affect US domestic prices. Consumer prices for toys, apparel, household furnishings and appliances have increased significantly since June. A range of survey data and Federal Reserve liaison information continue to indicate that inflation is expected to pick up over the coming months as businesses increasingly pass on tariff and substitution costs.

2.2 Domestic economic activity

In the August Statement, GDP growth was expected to pick up further, led by a recovery in private demand growth. Economic activity has evolved broadly in line with those forecasts, with outcomes if anything a bit stronger than expected. Recent partial indicators suggest that year-ended GDP growth will increase in the September quarter by a little more than expected in the August Statement. The easing in monetary policy this year has contributed to a stronger-than-expected pick-up in housing prices, but is unlikely to have materially driven the rebound in private demand growth so far, given the usual lags in transmission. Consumer and business sentiment do not appear to have been much affected by global trade policy developments.

The recovery in Australian GDP growth has continued broadly as expected, and there is further evidence that the anticipated shift in the composition of growth from public to private demand is occurring.

GDP growth picked up to 0.6 per cent in the June quarter, which was slightly stronger than expected, led by private demand (Graph 2.8). In year-ended terms, GDP growth increased to 1.8 per cent; this is a little below our estimate of potential output growth. The pick-up in private demand growth over the year to the June quarter was stronger than expected in the August Statement, driven by household consumption.

Public demand increased in the June quarter, but by less than anticipated. This was due to another unexpected decline in public investment (Graph 2.9), which was broadly based as infrastructure projects reached completion or moved into stages of reduced work. Projections in government budgets suggest that the pipeline of public infrastructure work will remain at high levels but is likely around its peak, as governments have sought to actively manage infrastructure spending. Liaison contacts have also noted that new public civil and engineering projects – including hospital, water utility and defence projects – are unlikely to be large enough to offset declining transport infrastructure spending. Public consumption grew strongly in the quarter, as expected, driven by spending on social services.

Data received since the August Statement suggest that household consumption growth has recovered a little faster than expected.

Household consumption grew by 0.9 per cent in the June quarter, above our expectation in the August Statement of 0.6 per cent. Temporary factors supported growth in the quarter, as expected, including the effect on measured household consumption of unwinding electricity subsidies, end-of-financial-year promotions and a rebound from weather-related disruptions in Queensland and New South Wales in the March quarter. However, the size of the increase in the quarter and the broad-based nature of growth over the past year suggest that the recovery in household consumption has been progressing, following the earlier increase in household incomes and wealth. Year-ended growth to June reflected a continued rebound across both essential and discretionary categories, with spending on discretionary services increasing particularly strongly (Graph 2.10). In per capita terms, consumption increased by 0.3 per cent over the year, the first increase in year-ended terms since June 2023.

Timely indicators for the September quarter point to continued growth in household consumption, broadly consistent with expectations in August (Graph 2.11). According to the ABS household spending indicator, nominal spending increased over the first two months of the September quarter, although at a slower pace than in the June quarter. This was mostly due to the expected pullback in spending on retail goods following end-of-year sales, as well as lower spending on recreation and culture services. Taken together with the strong June quarter result, these outcomes suggest that the level of consumption is likely to be a little higher in the September quarter than expected in the August Statement. The gradual pick-up in consumption growth this year is consistent with retail liaison contacts reporting a modest uplift in underlying retail demand. That said, measures of consumer sentiment remain some distance below their long-run averages.

The gross household saving ratio eased by slightly more than expected in the June quarter. Real household income was little changed in the quarter, as expected. Strength in labour income was offset by a decline in social assistance and insurance transfers following the temporary boost from weather-related payments in the March quarter.

Prices in the established housing market have increased by more than expected. Dwelling investment has picked up over the past year.

In year-ended terms, dwelling investment increased by around 5 per cent in the June quarter, broadly in line with the August Statement. Dwelling investment growth has been driven by increased building approvals from mid-2024 and builders working through an elevated pipeline of work; capacity constraints have eased over the past year, helped by the completion of some large public infrastructure projects. In turn, the pick-up in building approvals prior to the first reduction in the cash rate in February was driven by a range of factors, including population growth and improved sentiment (as buyers believed the cash rate had peaked). Since February, there has been little further pick-up in approvals. This could reflect the usual lags between monetary policy and residential building activity evident in previous easing phases. However, it could also reflect that (unlike other easing phases) building approvals were increasing prior to the first cash rate reduction, possibly in anticipation of stable or easing monetary policy (Graph 2.12).

Housing price growth has picked up more quickly than expected but remains within the range seen during previous monetary policy easing phases. National housing prices grew by 2.2 per cent in the September quarter. Recent price outcomes, in combination with upwards revisions to past data and a pick-up in housing credit growth (especially to investors; see Chapter 1: Financial Conditions), have provided further evidence that the housing market is responding to the easing in monetary policy. Market conditions remain tight, with auction clearance rates rising to 18-month highs of above 70 per cent. The Australian Government’s 5% Deposit Scheme is expected to put some further upward pressure on housing prices in the period ahead (see Chapter 1: Financial Conditions). Rising housing prices, alongside equity price increases, contributed to the 4.5 per cent increase in real household wealth over the year to June, which is expected to support household consumption over the forecast period (Graph 2.13).

At this stage, tariffs and other global policy developments do not appear to have had a material impact on aggregate economic activity in Australia.

Global trade tensions appear to have had little effect on consumer sentiment in Australia. Measures of economic policy uncertainty have eased, with some measures of uncertainty now back near their long-term average. Consumer sentiment remained in a relatively narrow range during the period of greatest uncertainty, with sentiment surveys suggesting that respondents were focused more on domestic issues than international developments.

Business surveys and liaison also continue to point to domestic factors, rather than international developments, being the primary driver of investment decisions. Business conditions, confidence and forward orders have been improving for some time and are now around their long-run averages (Graph 2.14). The resilience of the forward-looking indicators as well as recent liaison and survey evidence suggest that the anticipated effect of heightened global uncertainty on business investment in 2025/26 may not materialise, or could take longer to play out than expected (see Chapter 3: Outlook). Even so, nominal capital expenditure intentions for the 2025/26 financial year suggest there will be little-to-no growth in business investment over the year, following an 18-month period where the level of real business investment had been flat. Liaison suggests that domestic factors such as high construction costs, domestic policy uncertainty (such as around the timing of government investment projects, project approvals and policies towards particular sectors like energy) and consumer demand are the most relevant factors for firms’ investment decisions. Those businesses that are expecting to increase their investment are typically focused on automation, digital transformation and data centres, or renewable energy projects.

Australia and the United States have agreed a common policy framework to support the supply of critical minerals used in commercial and defence industries. It will include investment commitments by both governments as well as measures to stabilise prices, and reflects a continuation of Australian Government efforts in recent years to encourage investment in critical minerals projects. The deal is expected to generate investment in the mining sector from 2027, reflecting both direct government financial investments in ‘priority’ projects and private spending.¹ While potentially significant for the development of Australia’s critical minerals industry, the expected scale of these investments is small as a share of aggregate economic activity.

Australian exports have been largely unaffected by global trade tensions to date, supported by resilient global activity. Export volumes rose in the June quarter, driven by strength in services exports, in particular tourism exports (Graph 2.15). Resource export volumes also edged up in the quarter, as an increase in iron ore export volumes offset a continued decline in coal exports. Resource export volumes have been broadly steady for a number of years now, and have remained so recently despite the rise in global trade tensions. This in large part reflects that global activity has been stronger than expected, sustaining global demand for commodities, and the prices of commodity exports have remained well above Australia’s average cost of production.²

Global developments so far appear to have had only a temporary effect on Australian imports. While the value of Australian imports from China increased sharply early in the June quarter, this subsequently unwound, suggesting Chinese firms have not reoriented trade from the United States to Australia. Global developments have so far had little effect on Australian import prices: the decline in the June quarter was driven by lower fuel prices rather than changing trade patterns, while the decline in the September quarter was driven by the slight appreciation of the Australian dollar over that period.

2.3 Labour market and wages

Labour market conditions overall have eased a little in recent months, as the unemployment rate has increased and employment growth has slowed. However, timely indicators of labour demand such as job advertisements, vacancies and employment intentions point to a broadly stable outlook, consistent with the recovery in GDP growth. Notwithstanding that labour market conditions have eased recently, we continue to assess that there is some remaining tightness (see section 2.5 Assessment of spare capacity), and growth in unit labour costs remains elevated.

Overall, we assess that labour market conditions have eased a little in recent months, albeit with mixed signals across different indicators.

The unemployment rate increased to 4.5 per cent in the month of September (Graph 2.16). For the September quarter as a whole, the unemployment rate averaged 4.3 per cent, a little above our August Statement forecast. Other measures of labour utilisation have been broadly stable in recent months. The hours-based underutilisation rate – a broader measure of spare capacity – and the medium-term unemployment rate are little changed since the start of the year. The underemployment rate increased to 5.9 per cent in September, to be back around its level in the first half of the year. While other indicators have generally shown evidence of an easing in labour market conditions since 2022, the underemployment rate remains below its 2022 level.

Employment growth has slowed in recent months by a little more than expected, and the employment-to-population ratio has declined. The fall in the employment-to-population ratio – which returned to its level earlier in the year – likely reflects some easing in labour demand, though labour supply has also eased with the participation rate edging lower. The recent slowing in employment growth has not coincided with an increase in layoffs or an increase in transitions out of employment.

The participation rate has declined slightly over recent months, likely reflecting both softer labour demand and softer supply due to a lessening in cost-of-living pressures. Weaker participation likely reflects it taking a bit more time and it being a little harder to find work as labour demand eases, as indicated by lower job finding rates for both the unemployed and new labour force entrants. Hires from outside of the labour force have stabilised over the past six months following elevated flows over recent years, consistent with fewer workers being drawn in to a labour market that has become less tight. The weaker participation rate may also reflect there being less incentive to enter or remain in the labour force due to a lessening in cost-of-living pressures. This possibility is consistent with a decrease in multiple job holders (from elevated levels) and the gradual decline in the underemployment rate since mid-2024. More generally, the participation rate continues to be supported by the long-run structural increase in female participation.

In the first half of the year, the contribution of market sector employment growth to total employment growth increased, while the contribution of the non-market sector declined (Graph 2.17). Industry-level data (available to the June quarter) indicate that the level of employment in the non-market sector was little changed over the first half of 2025, which was weaker than expected, following strong growth over the previous few years. In year-ended terms, employment growth in the market sector continued to pick up, consistent with the recovery in GDP growth and the shift from public to private demand growth.

Some other indicators are consistent with stable or even slightly tighter labour market conditions. The rate of layoffs, which began increasing in 2022, stabilised over the past year at a relatively low level by historical standards and has drifted down a little recently – though measures of expected layoffs provide a more mixed picture (Graph 2.18). Liaison measures of current headcount and employment intentions were little changed over the September quarter. The rate of voluntary job separations – the ‘quits rate’ – has picked up recently after having eased more rapidly than other labour market indicators since its 2022 peak (Graph 2.19). This is also consistent with an increase in expected job mobility seen over the six months to August. These developments could suggest that inter-firm competition to attract and retain staff has increased, indicating tighter labour market conditions.

Leading indicators continue to point to a broadly stable near-term outlook for labour market conditions. Measures of labour demand such as job advertisements and vacancies are close to or slightly below levels of a year ago, and employment intentions from business surveys and the RBA’s liaison program have been relatively stable (Graph 2.20). Households’ unemployment expectations have also remained broadly unchanged since the start of the year. Combined, these data point to little change in the unemployment rate in the near term (see Chapter 3: Outlook).

Wages growth remained steady at 3.4 per cent in year-ended terms in the June quarter, while quarterly growth eased to 0.8 per cent.

Aggregate wages growth has moderated since 2023, reflecting the earlier easing in labour market conditions. Private sector wages growth was 0.8 per cent in the June quarter, in line with expectations (Graph 2.21). Looking through the effect of administered decisions – which boosted the wages of aged care and childcare workers in the March quarter – the underlying momentum in private sector wages has been broadly steady in recent quarters. Public sector wages growth eased slightly to 1.0 per cent in the June quarter. This was a little stronger than anticipated in the August Statement, largely owing to agreements coming into effect earlier than expected.

Timely indicators suggest that private sector wages growth is likely to have eased in the September quarter. Indicators of wages growth – including information from the RBA’s liaison program, Treasury’s single-touch-payroll indicator, and Commonwealth Bank of Australia’s wage growth indicator – have moderated in recent months, consistent with a slowing in private sector wages growth in year-ended terms in the September quarter. This slowing in growth is broadly consistent with our forecasts (see Chapter 3: Outlook), although timely indicators are more volatile than the Wage Price Index (WPI).

Year-ended growth in the national accounts measure of average earnings (AENA) per hour increased to 4.9 per cent in the June quarter, stronger than expected in the August Statement. AENA has continued to grow more strongly than the WPI, with the gap between AENA and WPI growth above its historical average (Graph 2.22). AENA is the measure of labour earnings that flows into unit labour costs. It is a broader and more complete measure of labour earnings than the WPI as it includes changes in bonuses, overtime and other payments, as well as the impact of workers transitioning to jobs with different levels of pay – though it is also more volatile and cyclical than the WPI.

Weak productivity growth continued to contribute to elevated unit labour costs growth.

Unit labour costs (ULCs) increased by 5.0 per cent over the year to the June quarter (Graph 2.23), a little stronger than expected. While growth in the AENA measure of labour costs is modestly above its long-run average rate, labour productivity growth has been weak in recent years so that unit labour costs growth – the most comprehensive measure of overall labour cost pressures – has been well above its average rate. ULCs growth excluding the non-market sector (for which productivity is hard to measure) and the mining and agriculture industries (whose influence on consumer prices is likely limited) also remains elevated. Elevated ULCs growth is consistent with more upward pressure flowing through from labour market tightness to firms’ labour costs than is signalled by the WPI alone.

Non-farm labour productivity declined by 0.1 per cent over the year to the June quarter, which was stronger than expected in the August Statement. Non-farm multifactor productivity – which is the part of labour productivity growth not due to changes in the capital-to-labour ratio but rather how efficiently inputs are being used – remained very weak, declining by 0.3 per cent over the year to the June quarter. Non-market labour productivity declined by 0.1 per cent over the year, while market sector productivity increased by 0.3 per cent.³

2.4 Inflation

Underlying inflation picked up in quarterly terms, to be higher than expected in the August Statement, driven by new dwellings and market services inflation, as well as some more volatile items. This is similar to what we have seen in some advanced economies over the past year, where housing and market services inflation remain elevated. Headline inflation was also significantly stronger than expected in the August Statement, due to firmer underlying inflation and stronger electricity and volatiles inflation.

The quarterly rate of underlying inflation increased in the September quarter, and was higher than expected in the August Statement.

Trimmed mean inflation increased to 3.0 per cent in year-ended terms, above the 2.5 per cent expected in the August Statement (Graph 2.24). This reflected the strong quarterly outcome as well as upward revisions to the previous quarter. In quarterly terms, trimmed mean inflation picked up to 1.0 per cent, from 0.7 per cent in the June quarter. The August Statement had forecast quarterly underlying inflation to remain around its recent pace.

Inflation was stronger than expected in the September quarter across several components, including new dwellings, market services and some less persistent items such as travel. Notably, new dwelling prices increased by more than expected in September as builders reduced discounts and increased base prices alongside an increase in housing market activity more broadly. Market services inflation also picked up in quarterly terms, particularly for restaurant meals and takeaway and fast food. Consumer durables prices, which can be volatile, increased by more than expected in the August Statement, while groceries inflation was broadly in line with expectations.

The strong inflation outcome could in part reflect underlying capacity pressure being a little stronger than we previously assessed (see section 2.5 Assessment of spare capacity). Consistent with this, both new dwellings and market services tend to reflect domestic inflationary pressures. On the other hand, the strong inflation outcome could reflect temporary factors less closely associated with domestic capacity pressures. For example, the pick-up in food-related market services inflation may instead have been caused by temporarily high inflation for some food inputs, such as meat and coffee. Similarly, the unwinding of discounting by home builders could be a one-off – although it could also continue alongside ongoing strength in the housing market. On balance, we take some signal from recent inflation data for the inflation outlook (see Chapter 3: Outlook).

Headline inflation increased to 3.2 per cent over the year to the September quarter, which was significantly stronger than the 2.5 per cent expected in the August Statement. Headline inflation was above underlying inflation over the year to the September quarter, primarily reflecting large increases in electricity prices following the partial unwinding of rebates. Electricity inflation added 0.5 percentage points to headline inflation over the year. Higher inflation for volatile items such as fuel also contributed to the increase in headline inflation relative to the June quarter.

Housing inflation picked up in quarterly terms, driven by stronger-than-expected new dwelling inflation.

New dwelling construction prices increased by 1.1 per cent in the September quarter, which was stronger than in the August forecast (Graph 2.25). New dwelling inflation also picked up in year-ended terms. Information from liaison indicates that demand for building new houses has picked up in recent months alongside improved buyer sentiment. The rise in new construction prices reflects both reduced discounting and higher base prices following the pick-up in demand.

CPI rent inflation eased to 3.8 per cent over the year to the September quarter, in line with expectations, and was stable in quarterly terms. Advertised rents growth has picked up by more than expected recently in capital cities as rental market conditions have tightened, which may gradually flow through to the stock of CPI rents as leases are updated.

Services inflation picked up in quarterly terms.

Market services inflation (excluding domestic travel and telecommunications) picked up in the September quarter, above our August forecast, although it has eased slightly in year-ended terms. The prices of these services are generally reflective of domestic inflationary pressures. The quarterly inflation rate picked up across a number of components, most notably for meals out and takeaway food – which may partly reflect difficulty finding staff, as well as rising costs for some food inputs (Graph 2.26).

Inflation for goods and services with administered prices (excluding utilities) picked up slightly in year-ended terms. Year-ended inflation was 4.4 per cent in the September quarter, which was around its historical average. Utilities prices increased strongly in the September quarter. Delays in the timing of electricity rebate payments in some states and territories caused a temporary increase in households’ out-of-pocket electricity costs. This will likely be unwound in the December quarter as households in these states receive a double rebate in October. Electricity prices excluding rebates rose by 4.8 per cent in the quarter, in line with expectations, due to the annual change in the default market offer. Gas prices also rose sharply due to annual price increases.

Goods inflation picked up in both quarterly and year-ended terms; international trade policy developments over recent months have had limited effects so far.

Retail goods inflation picked up in the September quarter to be 2.0 per cent in year-ended terms. Consumer durables prices increased by more than expected in the August Statement, reflecting strong increases in prices for a few items, notably accessories. Groceries inflation excluding fruit and vegetables increased a little in the September quarter, broadly as expected. While it is hard to determine what is happening to firms’ margins in aggregate, liaison suggests retailers’ margins are not under as much pressure as earlier in the year. Firms have reported that the earlier appreciation of the exchange rate, particularly against the US dollar, is not being widely passed through to lower prices. Information from liaison suggests that global trade tensions have not materially impacted firms’ pricing decisions.

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 but have increased a little in recent months, although this may have partially reflected market dynamics unrelated to fundamentals. Unions’ long-term inflation expectations have declined to be close to the midpoint of the inflation target range. Our assessment is that long-term inflation expectations remain anchored at the target.

2.5 Assessment of spare capacity

Despite some recent gradual easing in labour market conditions, a range of information – including labour market and labour cost data, business surveys and model estimates – continues to suggest that labour market conditions are a little tight. Survey measures of firms’ capacity utilisation and most model-based estimates of the output gap also indicate some ongoing economy-wide capacity pressures. Against this backdrop, strong underlying inflation outcomes, including in the housing and market services sectors, together with a recent pick-up in capacity utilisation, suggest that there could be a little more capacity pressure in the economy than we previously assessed.

Overall, we assess that there is still some tightness in the labour market, though this assessment is uncertain.

Labour market conditions have eased a little recently but a range of indicators continue to suggest that some tightness remains. The latest monthly reading for the unemployment rate, on its own, suggests that the labour market could be close to balance. However, the monthly data can be volatile and part of the September increase may turn out to be transitory. A broader set of indicators continues to point to some tightness in the labour market (Graph 2.27). The underemployment rate has fallen a little since mid-2024 and, despite a tick up in September, remains at a low level. The rate of layoffs has decreased recently and also remains at a low level. The ratio of vacancies to unemployed workers and the share of firms reporting labour as a significant constraint on output remain above their respective averages, though both have eased a little over the past year. Growth in unit labour costs also remains high.

The relatively low quits rate continues to suggest that labour market conditions could be less tight, though it has increased recently. A decline in the quits rate over recent years suggested that inter-firm competition to attract and retain staff had eased; that was consistent with the moderation in wages growth over the past couple of years. While the quits rate has picked up again recently, reversing part of its earlier decline, it is around its average since the global financial crisis, and continues to suggest that labour market conditions could be somewhat closer to balance than other indicators.

Model-based estimates continue to point to a tighter labour market than suggested by other indicators, though these estimates are imprecise. Model estimates suggest that the labour market has experienced a prolonged period of tightness with only a little easing over the past two years (Graph 2.28). The estimates in our model suite vary, but each implies that the labour market continues to be tighter than full employment.

Recent indicators suggest there could be a little more overall capacity pressure in the economy than we previously assessed.

The August Statement highlighted the possibility that there could be more excess demand in the economy than in our central assessment. At that time a range of indicators were pointing to there being a degree of capacity pressure in the economy, with some remaining tightness in labour market conditions, high unit labour costs growth, elevated capacity utilisation and high output price inflation. Set against that, some indicators suggested that capacity pressures could be lower. For example, CPI inflation outcomes had been softer than expected through the year, in part reflecting margin compression in the housing construction industry, and the quits rate had declined suggesting a reduction in wage pressure. These latter factors motivated a forecast judgement that the economy had moved relatively close to balance. However, we recognised the possibility that there could in fact be a little more excess demand than we thought.⁴

Recent data, on balance, suggest we should put a little more weight on the possibility that there is still some excess demand in the economy. The NAB measure of capacity utilisation has picked up recently, reversing part of its previous decline. 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 2.29). The increase has been evident particularly in the construction and retail sectors. Residential vacancies data also show utilisation of the housing stock remains elevated and has stabilised recently, following earlier increases. Alongside evidence of higher capacity utilisation recently, the quits rate has picked up and unit labour cost and inflation data have been stronger than expected. While the strong trimmed mean inflation outcome in the September quarter likely in part reflects temporary factors, its drivers suggest there is a little more underlying inflationary pressure than previously assessed (see section 2.4 Inflation). Taken together, we interpret recent data as indicating that there is a little more capacity pressure in the labour market and broader economy than we had assessed in August. Given signs that the labour market has eased a little recently, this implies that the economy was somewhat further from balance in August than we thought at the time.

Model-based estimates point to the output gap being small and positive, though there is significant uncertainty around these estimates. The level of GDP in the June quarter remained higher than most model estimates of potential output, with the median estimate from the RBA’s suite of models suggesting a small positive output gap (Graph 2.30). Indeed, only one estimate from the suite is negative. The individual model estimates vary widely, but even that range understates the true level of uncertainty as each model estimate is itself uncertain. Nonetheless, these model estimates support the assessment that there is some remaining capacity pressure in the economy.

Endnotes

1 For background on Australia’s critical minerals sector and implications of how demand for critical minerals could evolve over time and could shape the sector, see Stinson H and I Cam (2025), ‘The Global Energy Transition and Critical Minerals’, RBA Bulletin, October.

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

3 For more information on productivity growth, see RBA (2025), ‘Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth’, Statement on Monetary Policy, August.

4 See Key risk #3 in RBA (2025), ‘Chapter 3: Outlook’, Statement on Monetary Policy, August.