The RBA's 3 November statement warns of "an increasing risk that higher Inflation expectations will become embedded" – a concern that helps explain why a majority of the Board chose to act rather than wait.

Inflation is not only about what prices are doing today. It is also about what people believe prices will do tomorrow. When households, businesses and workers come to expect higher inflation, they tend to behave in ways that make it happen: firms set prices with future cost rises in mind, and wage claims Factor in expected living costs. Central banks call this the risk of expectations becoming "embedded".

That risk sits at the centre of the Monetary Policy Board's decision on 3 November 2026 to lift the cash rate target by 25 basis points to 4.85%. The statement says "there is an increasing risk that higher inflation expectations will become embedded." Six members voted for the increase; three preferred to hold at 4.60%.

What the RBA is seeing

The statement notes upside risks to inflation expectations and says some measures have risen lately. It does not publish a single headline figure for expectations, but RBA officials have described the signs.

Deputy Governor Andrew Hauser, speaking at a Citi conference in Sydney on 21 October, said a rising share of firms see 3–3.5% inflation as the "new normal". That range sits above the RBA's 2–3% target band, where the Bank aims for the midpoint. His conclusion was unambiguous: "We can't allow expectations to shift away from the target."

The backdrop gives those beliefs something to feed on. According to the RBA's inflation data:

  • Monthly headline CPI rose to 4.3% in the year to September 2026, from 4.0% in August and 3.5% in July.
  • The trimmed mean, the RBA's underlying measure, was 3.7% over the year to the September quarter and 1.0% in that quarter.

These are separate measures – headline captures every price change, while the trimmed mean is designed to show the underlying trend – but both are above target. The statement also describes inflation as "broadly based", meaning the price pressures are not confined to a few items.

Why time is the problem

Expectations become more of a risk the longer inflation stays high. The statement makes that link implicitly: "The Board is conscious of the period in which inflation has been too high."

Inflation peaked at 7.9% at the end of 2022. It came down from there, but the November Statement on Monetary Policy now forecasts that headline and underlying inflation will stay above 3% through much of 2027. The forecast table shows headline inflation of 4.5% in the year to December 2026 and 3.7% in June 2027, with the trimmed mean at 3.6% and 3.5% respectively. By December 2027, the forecasts are 2.7% for headline and 2.9% for the trimmed mean. Inflation is not expected to reach the top of the target range until late 2027, about three quarters later than previously forecast.

These are forecasts, and the RBA flags heightened uncertainty, including scenarios in which inflation is higher and activity lower. But the direction of travel explains the Board's sense that waiting is getting riskier. Each extra quarter above target gives households and firms another reason to doubt that 2–3% is where inflation will settle.

Assistant Governor Sarah Hunter put it simply on 25 October: "We don't want to live with high inflation for a long time."

Actions speak louder than words

RBA research suggests that holding expectations in check is not just a matter of communication. Research Discussion Paper 2026-06, "Perceived Monetary Policy Rules: Evidence From Professional Forecasters in Australia", by Jonathan Hambur and Qazi Haque, was published on 22 October. It found that forecasters' perceived responsiveness of the RBA to inflation rose sharply after the 2022 tightening. Beliefs shifted after actual policy moves; communication alone was not enough.

That finding helps frame the majority's choice. If what the RBA does matters more than what it says, then delivering an increase sends a stronger signal than warning that one might be needed. Hauser made a related point: "We do need to keep working on the very basic point that higher interest rates actually bring inflation down."

The 1970s warning, and the cost of acting

The worst case of embedded expectations is a wage-price spiral, where wages and prices chase each other upwards. Board member Iain Ross AO examined that risk in a speech on 22 September, "A Wage-price Spiral: What are the Chances?"

He recalled that inflation rose from about 3% in 1969 to over 16% in 1974, when male average weekly Earnings grew by 25%. Quarterly wage indexation began in early 1975 and was abandoned in July 1981. Today's institutions are very different: union membership was slightly over half in the late 1970s but is now 13%. Ross concluded that "there is little evidence that a self-sustaining Wage-Price Spiral has emerged following the latest inflationary episode."

Hunter also cited 1970s price controls and an early-1980s wage freeze as alternatives that failed. Neither reference is a prediction. Together, they show why early signs of drifting expectations are treated seriously.

None of this comes free. The statement acknowledges that "The economy is slowing, housing prices have fallen significantly and the Unemployment rate has risen." Unemployment is forecast to reach 4.9% by December 2027 and 5.1% by December 2028. Hauser was frank: "No lost Job is one to celebrate."

Three Board members judged that holding at 4.60% was the better course this time. Their reasons have not been published.

The bottom line

The RBA's concern is that the longer inflation runs above target, the more likely people are to treat higher inflation as normal – and the harder it becomes to bring down. With some expectations measures rising, firms citing a 3–3.5% "new normal" and forecasts showing inflation above 3% through much of 2027, the majority decided it could not wait. The next monthly CPI update is due on 25 November, ahead of the 8 December decision. Readers wanting to understand the implications for them can consider speaking with a licensed adviser or their lender.