The Reserve Bank's warning on Melbourne Cup Day that Inflation will stay "elevated through much of 2027" is not only a Mortgage story. Several federal taxes rise automatically with prices, and income tax thresholds that are not indexed quietly bite harder each year that wages chase inflation. With annual CPI at 4.3% in September, the gap between sticker prices and Take-home pay is about to become a tax story too.

What the RBA said on 3 November

The RBA's Monetary Policy Board lifted the cash rate target by 25 basis points to 4.85% on 3 November 2026. Six members voted for the increase and three voted to hold at 4.60%, according to the bank's statement.

The board said "inflation remains elevated and recent data indicate that it is broadly based". It now forecasts inflation to "remain elevated through much of 2027" and expects it to stay above 3% over the coming year.

The board also flagged a growing risk that higher inflation expectations become entrenched. On its outlook, headline inflation is not expected to reach the top of the 2–3% target band until late 2027.

Two weeks earlier, Deputy Governor Andrew Hauser said the inflation outlook was "materially worse" than forecast. He said a growing share of businesses saw "3 per cent, 3.5 per cent" as "the new normal", describing shifting expectations as "the central banker's nightmare".

How indexed excise works

Some taxes are written so they adjust to inflation without any new decision by Parliament. Excise is the clearest example.

Fuel excise and most alcohol excise rates are indexed to the consumer price index twice a year, in February and August. The new rate reflects price movements over the previous period, so a stretch of high inflation flows through to the excise rate at the next indexation date.

Tobacco excise works differently. It is indexed to average weekly ordinary time Earnings (AWOTE), also twice yearly, in March and September. Because it follows wages rather than prices, its path depends on how fast pay grows, not on the CPI itself.

The exact cents-per-litre or per-stick rates for the next indexation dates have not yet been published, and the ATO's excise rate pages are the place to check once they are. What is clear is the direction: while prices and wages keep rising, indexed excise rates follow them up.

The fuel excise backdrop

Fuel excise has already been a political flashpoint this year. From 30 March 2026, excise was halved, a 32-cent-a-litre cut that took the rate to 26.3 cents a litre for three months to 30 June.

A further, tapering cut of 16 cents a litre then applied from 1 July to 2 August 2026, timed to end at the August indexation date. Treasurer Jim Chalmers told Parliament that relief was worth about $11 a tank for a typical motorist.

Further relief now looks unlikely. Analysis published on 1 November said fuel excise cuts and energy rebates are no longer part of the government's approach as it prepares the mid-year budget update.

That means the February indexation date is likely to pass with the standard formula applied, and with the RBA expecting inflation above 3%, the adjustment will reflect that.

Bracket creep: the quieter squeeze

Bracket creep is the term for what happens when wages rise with inflation but income tax thresholds stay where they are. A worker can receive a pay rise that merely keeps pace with prices, yet pay a higher share of income in tax.

Australia's Personal Income tax thresholds are not indexed. They move only when Parliament legislates. The current scale, with the 16% rate cut to 15% from 1 July 2026 and legislated to fall to 14% from 1 July 2027, offers some offset, but it does not move the thresholds themselves.

Economists and tax commentators have long pointed out that a period of high inflation speeds up bracket creep, because nominal wage growth pushes more income into higher brackets faster. The longer inflation stays elevated, the more of any tax cut is clawed back this way.

Hypothetical example: Mia earns $80,000 in 2026-27. Using the resident rates for that year (nil to $18,200, 15% to $45,000, 30% to $135,000), her income tax is $14,520, an average rate of 18.15%, ignoring the Medicare levy and offsets.

Now suppose her salary rises 4.3%, matching the September CPI figure, to $83,440. Her tax rises to $15,552, an average rate of about 18.64%. Every extra dollar is taxed at 30%, so her after-tax income rises from $65,480 to $67,888.

That is an after-tax increase of about 3.7%, below the 4.3% rise in prices. In real terms, Mia is slightly worse off, even though her gross pay kept pace with inflation. Actual outcomes depend on individual circumstances, including offsets and the Medicare levy.

Why this matters for the budget and households

For the federal budget, indexed excise and bracket creep both lift Revenue when inflation runs hot. That gives the Treasurer more room in principle, but also raises questions about whether households are being taxed by stealth.

For households, the effects stack up. Fuel, alcohol and tobacco prices carry indexed excise, while wage rises may be partly absorbed by a higher average tax rate. Add a cash rate at its highest level since November 2008, and the squeeze on Disposable Income for many households is broad and hard to escape.

What to watch

  • 4 November: the RBA's Chart Pack is released, with more detail on the inflation outlook.
  • 25 November: the next monthly CPI release, a key read on whether inflation is easing.
  • December: the mid-year economic and fiscal outlook, which will show the government's updated revenue and inflation forecasts.
  • February 2027: the next scheduled CPI indexation of fuel and alcohol excise.
  • March 2027: the next scheduled AWOTE indexation of tobacco excise.
  • 1 July 2027: the 15% rate falls to 14% under legislated changes.