Key Highlights

  • Bullock said underlying inflation had run at about 3.5% for the past six months, a percentage point above target.
  • That is distinct from headline CPI of 4.0% over the year to August and the trimmed mean’s 3.6% annual pace to June.
  • In quarterly terms, readings of 0.8 and 1 compare with about 0.6% a quarter that is consistent with 2.5% a year.

Governor Michele Bullock boiled the inflation problem down to a single gap, underlying inflation running about one percentage point above the 2.5% midpoint, and that yardstick goes a long way to explaining September's rate rise.

Numbers about inflation can blur together. There is the headline rate, the trimmed mean, monthly figures, quarterly figures and forecasts stretching into 2028. At her media conference on 29 September 2026, after the Reserve Bank of Australia's Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60%, Bullock cut through much of that with a simple comparison.

Underlying inflation, she said, had been running at "about 3.5 per cent for the past six months", which put it "a percentage point above our target". The RBA's target is 2–3%, and it aims for the 2.5% midpoint. A one-point gap, held for half a year, was central to her case for tightening further.

Which inflation measure she meant

It matters which measure Bullock was describing, because Australia's two most-quoted inflation figures tell slightly different stories.

Her "about 3.5 per cent" referred to underlying inflation. The RBA's preferred underlying gauge is the trimmed mean, which was 3.6% over the year to the June quarter 2026. In the June quarter alone, the trimmed mean rose 0.8%, seasonally adjusted. As the name suggests, it trims away the most extreme price movements in a period to give a clearer view of the persistent trend.

Headline CPI is a separate measure that includes every item in the basket, including volatile ones such as fuel. It was 4.0% in the year to August 2026, on the monthly measure, and 3.9% for the June quarter. Fuel is one such volatile component: the minutes of the September meeting noted that domestic petrol and diesel prices were 13% higher than forecast in August.

Underlying measures are generally less affected by such swings, so a one-point gap in underlying inflation points to price pressures that are broad rather than confined to a few items.

Translating the gap into quarterly terms

Bullock also expressed the target in quarterly terms. Inflation of about 0.6% a quarter, she said, is consistent with roughly 2.5% a year. Recent readings, by contrast, had been 0.8 and 1.

Simple arithmetic shows how much those small quarterly differences add up. As an illustration only, and not an RBA figure, 0.8% compounded over four quarters works out at roughly 3.2% a year, while 1% compounded over four quarters works out at roughly 4.1%. Against a target consistent with about 0.6% a quarter, even a couple of tenths of a percentage point each quarter makes a material difference to the annual outcome.

That framing puts the focus on the pace at which inflation returns to target, not just its direction. The minutes said the Board's strategy is to return inflation to target "in a timely manner".

Why the gap has proved stubborn

Bullock's diagnosis was that the problem lies at home. "Inflation is too high and has been driven by domestic capacity pressures," she said. The minutes recorded that staff judged the underlying inflation surprise more likely reflected domestic capacity pressures than cost pass-through from the Middle East.

Several factors feed into that. June quarter GDP was a little stronger than expected, led by private business investment, which was up more than 10% over the year. The Board's statement said "growth in business investment and debt is strong". On costs, unit labour cost growth was above a level consistent with the target, driven mainly by weak productivity rather than strong wages. "The bottom line is that productivity is doing nothing," Bullock said. She was equally clear that "there is no wage price spiral going on in Australia."

The duration of the problem adds to the concern. Bullock noted inflation has been outside the target band for six years, apart from a brief return inside it in 2025. The minutes said developments "pointed to an increase in the risk of persistently elevated inflation", and members judged that "inflation remained too high."

Bullock linked the gap to expectations, saying the aim was to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy". The Board's statement, in paraphrase, noted that short-term inflation expectations were elevated.

How long closing the gap may take

The RBA's August Statement on Monetary Policy set out a path for underlying inflation, though its forecasts were finalised on 5 August, before the September rate rise. Those forecasts had the trimmed mean easing from 3.6% in the year to June 2026 to 3.3% by December 2026, 3.0% by June 2027 and 2.6% by December 2027. The trimmed mean was expected to stay at 3.0% in June 2027 and decline to "the midpoint of the 2–3 per cent target range in 2028".

On that projection, the one-point gap Bullock described would close only gradually over roughly two years. Since August, the statement said, "some of the upside risks flagged in August are materialising."

Bullock was candid that the outcome is uncertain. "Will it be enough? I don't know," she said of the September increase. She would not offer forward guidance, but said: "The Board will increase interest rates again if that's what's needed to get inflation down." She also noted the full effect of rate changes takes 12 to 18 months.

Her end goal was framed in everyday terms: inflation back at 2.5%, where "people are not worrying about it". In the meantime, she acknowledged the cost of getting there: "Every household has seen how the price of everything has gone up in recent years."

The next data point arrives with the September CPI release, scheduled for 28 October, ahead of the Board's next decision at 2.30 pm on 3 November 2026.

The bottom line

Bullock's yardstick is simple: underlying inflation of about 3.5% over the past six months, a full percentage point above the 2.5% midpoint the RBA aims for. That is distinct from headline CPI, which was 4.0% in the year to August, and from the trimmed mean's 3.6% annual pace to June. Expressed quarterly, readings of 0.8 and 1 compare with about 0.6% needed for target. With the gap persisting and attributed to domestic capacity pressures, the Board judged a further rate rise warranted, and has left open whether more will follow.