Key Highlights

  • Annual Inflation eased to 3.5% in July, while trimmed mean inflation remained higher at 3.6%.
  • Housing rose 5.0% annually and was the largest contributor to inflation during July.
  • Spending growth differs sharply by age, with Australians aged 65 and over recording faster annual growth.
  • CommBank expects a 25-basis-point September rate increase, taking the cash rate to 4.60%.

Australians can be cutting back while inflation remains elevated, and the two trends are not necessarily contradictory. Inflation measures the pace at which prices are changing rather than how comfortable households feel or how much they are buying.

That distinction is becoming increasingly important as households contend with years of higher prices, weaker consumer confidence, falling house prices and three interest-rate increases since the start of 2026. Despite those pressures, inflation remains above the Reserve Bank of Australia’s 2% to 3% target range.

Inflation Slows but Remains Above Target

Annual inflation eased from 3.8% in June to 3.5% in July. However, trimmed mean inflation, which removes some volatile price movements to provide a view of underlying pressures, remained at 3.6%.

Lower inflation does not mean prices have returned to earlier levels. It means prices are rising at a slower rate. Households can therefore continue to experience a high cost of living even when the headline inflation rate moderates.

Housing Leads the Price Pressure

Housing was the largest contributor to inflation in July, increasing 5.0% over the year. Within the category, new dwelling construction prices rose 5.7%, rents increased 3.6% and electricity prices climbed 6.1%.

Other essential areas also recorded increases. Food and non-alcoholic beverages rose 3.2%, while health prices increased 3.8%.

These categories are difficult for many households to avoid, helping explain why cost pressures can remain noticeable even as consumers reduce discretionary expenditure.

Global Costs Continue to Feed Through

Some inflation pressure is also originating outside Australia. Higher oil, diesel, fertiliser and other costs linked to conflict in the Middle East can take time to reach consumers.

Businesses may initially absorb higher input costs before passing them through to customers. CommBank said this delayed transmission is one reason inflation can remain elevated even while broader economic activity slows.

This means current inflation can partly reflect cost increases that began earlier rather than only the level of household Demand today.

Capacity Constraints Complicate the Picture

Australia also faces limits on how quickly the economy can expand without creating additional price pressure. Capacity constraints mean demand for some workers, goods and services can remain higher than available supply.

Weak productivity adds to the challenge. If businesses cannot produce significantly more with existing workers, equipment and technology, shortages and cost pressures can emerge sooner.

Investment across AI, defence, renewables, transport and housing is also competing for labour, Capital and materials, adding another layer to the supply-demand balance.

Household Experiences Diverge by Age

The cost-of-living squeeze is not affecting every household in the same way. CommBank data showed spending among Australians aged 65 and over was 10.1% higher in June than a year earlier.

By comparison, spending growth among 25 to 34-year-olds was 4.2%, while the 35 to 44 and 45 to 54 age groups recorded growth of 4.5%.

Housing Debt is one Factor behind the divide. Younger and middle-aged households are more likely to carry mortgages, making them more sensitive to interest-rate increases, while older households that own homes outright may avoid the same repayment pressure.

Demand Extends Beyond Households

Households represent only one part of economic demand. Businesses continue to invest, governments are spending and major projects are competing for workers and materials.

Australia’s economy expanded 0.4% in the June quarter and 2.1% over the year. CommBank described the economy as entering a cyclical slowdown, while noting that the composition of growth is changing.

Business Investment in areas including renewables and data centres is becoming more important, while public investment remains elevated despite moving down from its peak.

Why Higher Rates Have Limits

Interest-rate increases can reduce demand, but they cannot directly resolve every source of inflation. Higher rates cannot immediately increase housing supply, improve productivity or reduce global oil prices.

They can, however, leave Mortgage borrowers with less disposable income, raise financing costs for businesses and delay investment and purchases. Over time, weaker demand can reduce competition for limited workers and resources.

The RBA has said the rate increases already delivered have not yet had their full effect and expects total spending to slow further.

Risks to Consider

The inflation outlook remains exposed to global energy costs, domestic capacity constraints, productivity, housing expenses and the timing of monetary-policy effects.

Further rate increases could place additional pressure on mortgage holders and economic growth, while persistent supply-side inflation may take longer to respond to weaker demand.

What to Watch Next

CommBank expects a 25-basis-point rate increase in September, which would take the cash rate to 4.60%. The next inflation readings, oil-price movements and evidence of slowing household demand will be important inputs for the interest-rate outlook.

The central question is whether inflation pressures ease as economic activity slows or remain persistent enough to require further monetary tightening.

Summary

Australia’s inflation challenge extends beyond household spending. Housing costs, global inputs, weak productivity and Supply constraints are keeping price pressures elevated even as many consumers reduce spending and face higher mortgage costs.