Annual inflation figures dominate the headlines, but at her September media conference Governor Michele Bullock framed the challenge in quarterly terms, and the gap between where inflation is running and where it needs to be.

Ask most people what the Reserve Bank's inflation target is, and they will say 2–3 per cent a year. That is correct, but it is not always the most useful way to track progress in real time. Inflation data arrive more frequently than once a year, and each new reading shows whether prices are rising at a pace consistent with the target.

At her media conference on 29 September, after the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent, Governor Michele Bullock offered a simple benchmark. Quarterly inflation, she said, needs to be "more around .6 rather than .8 and 1".

Doing the arithmetic

Bullock's point was that about 0.6 per cent a quarter is consistent with roughly 2.5 per cent a year, the midpoint of the target range. The arithmetic helps explain why the difference between 0.6 and 0.8 matters more than it might appear.

As a simple illustration (not RBA calculations), compounding a constant quarterly rate over four quarters gives approximately:

  • 0.6 per cent a quarter: about 2.4 per cent a year, close to the 2.5 per cent midpoint.
  • 0.8 per cent a quarter: about 3.2 per cent a year, above the top of the 2–3 per cent band.
  • 1.0 per cent a quarter: about 4.1 per cent a year, well above target.

In other words, a difference of just 0.2 percentage points in a single quarter, if sustained, is roughly the difference between hitting the target and missing it. That is why the Board watches each quarterly release closely.

Where inflation is now

Bullock was clear that inflation is running above that pace. "Inflation is about 3.5 per cent," she said, referring to underlying inflation, a full percentage point above the 2.5 per cent midpoint. She also offered some perspective: "Inflation is not in double digits."

It is important to distinguish between the two main measures:

Headline CPI captures the change in the overall price level, including volatile items. The monthly CPI indicator showed headline inflation of 4.0 per cent over the year to August. Over the year to the June quarter, headline CPI was 3.9 per cent, according to the August Statement on Monetary Policy.

Underlying inflation, measured by the trimmed mean, strips out the largest price movements to reveal the broader trend. It was 3.6 per cent over the year to the June quarter.

Speaking to the House of Representatives Standing Committee on Economics on 18 September, Bullock summed up: "Over the past year, both headline and underlying measures of inflation were around or a little above 3½ per cent."

Why the pace has been stuck

Bullock pointed to several forces keeping inflation above the 0.6 per cent quarterly benchmark.

"Inflation is too high and has been driven by domestic capacity pressures," she said. Businesses also expect costs to keep rising: "Indeed, businesses in our liaison program continue to expect strong increases in their costs over the year ahead."

External shocks have added to the pressure. "the Middle East conflict has been a big shock, and it's made us all poorer in this country," Bullock said, adding that "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher." In her Canberra testimony she noted: "Oil and related prices have increased sharply again and will add directly to inflation."

The Board's September statement also cited AI-related demand pushing up technology goods prices, firms raising or planning to raise prices, high short-term inflation expectations and recent inflation outcomes that were stronger than expected.

Productivity is another constraint. "The bottom line is that productivity is doing nothing," Bullock said, and "monetary policy can't do anything about productivity." She told parliament: "Continued weak productivity growth means that the economy cannot grow strongly without putting pressure on inflation."

Six years and counting

Part of the urgency stems from how long inflation has been above target. "we have been outside of our target now for six years," Bullock said.

Inflation has come a long way from its peak. Bullock told the parliamentary committee: "Inflation fell significantly from its peak of 7.9 per cent at the end of 2022". But the final stretch back to the midpoint is proving slow. The Board's statement said it is focused on preventing high inflation from becoming embedded.

The RBA's August forecasts showed the expected path. Trimmed mean inflation was forecast to ease from 3.6 per cent in the June quarter 2026 to 3.3 per cent by December 2026, 3.0 per cent by June 2027 and 2.6 per cent by December 2027, before reaching 2.4 per cent in 2028. Headline inflation was expected to "return to the 2–3 per cent target range by early 2027". Bullock told parliament in September that "inflation will not return to around the midpoint of the target range until late 2027."

Those forecasts carry an important caveat: they were prepared before the September hike, assuming a cash rate of roughly 4.3–4.5 per cent.

Looking ahead, the next CPI release is scheduled for 28 October, less than a week before the Board's 3 November decision at 2.30 pm. Measured against Bullock's benchmark, the question will be how close the latest outcomes come to that 0.6 per cent pace.

The Board has not pre-committed. "The Board will increase interest rates again if that's what's needed to get inflation down," Bullock said, while also declaring: "I'm not going to give you forward guidance." The effects of earlier increases are also still working through: "A lot of that effect is still to flow through," she said.

The bottom line

Bullock's quarterly benchmark turns an annual target into a practical test. Inflation of about 0.6 per cent a quarter is consistent with the 2.5 per cent midpoint; readings around 0.8 or 1 per cent, if sustained, compound to annual rates well above the band. With underlying inflation at about 3.5 per cent and headline CPI at 4.0 per cent in August, Australia is not yet back to that pace.

The RBA's pre-hike forecasts envisaged the gap closing gradually through 2027 and into 2028. Each quarterly reading between now and then, starting with the October release, will show whether inflation is moving towards the 0.6 per cent pace the Governor described or remaining stuck above it.