Buried in the September Board minutes is a staff expectation that underlying inflation for the September quarter will come in above the RBA's own August forecast, and the official figures are not far away.

Forecasts age quickly. Barely two months after the RBA finalised its August projections, the minutes of the Monetary Policy Board's September meeting recorded that staff expected underlying inflation in the September quarter to be higher than forecast in August.

It is a short line in a long document, published on 13 October. But it matters, because it tells readers that the RBA's own economists see inflation running warmer than the path they mapped out only weeks earlier. With the next CPI update scheduled for 28 October, and the next cash rate decision due at 2.30 pm on 3 November, fresh data bearing on that expectation are close at hand.

What the minutes actually say

The minutes do not give a specific September-quarter number, and this article does not supply one. What they do provide is the direction of the surprise and the reasons behind it.

According to the minutes:

  • July inflation data were stronger than expected, particularly for market services.
  • The share of items with prices rising by more than 2½ per cent was "well above average".
  • Staff judged that the upside surprise more likely reflected domestic capacity pressures than pass-through of Middle East cost shocks.
  • Domestic petrol and diesel prices were 13 per cent higher than had been forecast in August.
  • Staff expected higher underlying inflation in the September quarter than forecast in August.

"Underlying" here refers to measures such as the trimmed mean, which excludes the largest price rises and falls in each period to show the broad trend. It is distinct from headline CPI, which includes every item in the basket. Over the year to the June quarter, the trimmed mean was 3.6 per cent and headline CPI 3.9 per cent; the most recent monthly headline reading was 4.0 per cent for August.

The benchmark it is being measured against

To understand what "higher than forecast" means, it helps to look at the August Statement on Monetary Policy, whose forecasts were finalised on 5 August. Its year-ended trimmed mean projections were:

  • 3.6 per cent for June 2026 (matching the published June-quarter outcome);
  • 3.3 per cent for December 2026;
  • 3.0 per cent for June 2027;
  • 2.6 per cent for December 2027;
  • 2.4 per cent for June and December 2028.

The Statement expected underlying inflation to decline "to the midpoint of the 2–3 per cent target range in 2028". The table does not include a separate September-quarter figure, but the path implied a steady easing from 3.6 per cent in June towards 3.3 per cent by December. A warmer-than-forecast September quarter would, in general terms, make that easing harder to achieve on the original timetable.

Governor Michele Bullock gave a useful yardstick at her 29 September media conference. She said quarterly inflation of about 0.6 per cent is consistent with about 2.5 per cent annual inflation, and contrasted that with quarterly readings of 0.8 and 1 per cent. She also said underlying inflation had been running at about 3.5 per cent over the past six months.

Why the RBA thinks it is running warm

The staff view points to the domestic economy rather than imported costs. Bullock was direct: "Inflation is too high and has been driven by domestic capacity pressures."

Several features of the economy support that diagnosis in the RBA's account:

  • A tight labour market: "Productivity growth remains weak and the labour market remains a little tight," Bullock said.
  • Labour costs: the minutes say unit labour cost growth is above what is consistent with the inflation target, driven mainly by subdued productivity growth rather than strong nominal wages.
  • Extra demand from AI: "The AI boom is also adding to demand in the Australian economy at a time when we already have capacity pressures," Bullock said.

Global factors are adding on top. The decision statement said upside risks flagged in August were materialising, including a broader Middle East conflict, higher global energy prices and AI-related demand pushing up technology goods prices.

How it fed into September's decision

The Board decided unanimously on 29 September to raise the cash rate target by 25 basis points to 4.60 per cent. The minutes say the August forecasts had required several favourable developments that no longer appeared likely to all occur.

Among the arguments for raising rates, members noted that upside inflation risks had materialised and that a timely response would best balance the Board's objectives. Arguments for holding included downside risks to activity and employment, the possibility of a larger-than-expected effect from falling housing prices, Middle East uncertainty and the lagged effects of earlier tightening.

Looking ahead, the Board has not committed to any particular path. The decision statement said: "Accordingly, the Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions." The minutes add that the Board will do what it considers necessary, "including increasing the cash rate target further if required."

Market pricing recorded in the minutes at the time of the meeting implied "an additional increase of around 15 basis points by the end of the year". That reflects market expectations, not an RBA forecast.

The November Statement on Monetary Policy, listed in the RBA's calendar, will be the place where any revisions to the inflation outlook are set out in full.

The bottom line

RBA staff told the Board in September that they expected September-quarter underlying inflation to exceed the August forecast, citing strong market services prices, broad-based price rises and domestic capacity pressures. The August path had the trimmed mean easing from 3.6 per cent in June to 3.3 per cent by December 2026. The next CPI update, listed for 28 October, will be closely watched for evidence on how the quarter turned out, ahead of the 3 November decision and new forecasts in November. Headline inflation, at 4.0 per cent monthly in August, is a separate measure. Anyone considering what this means for their own finances may wish to seek advice from a licensed professional.