When July's inflation data came in hotter than expected, RBA staff had to decide whether the cause was imported fuel costs or demand running ahead of supply at home, and their answer helped shape September's rate rise.

Every surprise in the inflation data raises the same question for a central bank: where did it come from? The answer matters, because a price jump driven by a global oil shock calls for a different reading than one driven by an economy running hot.

In September, that question was front and centre. The minutes of the Monetary Policy Board's 28–29 September meeting, published on 13 October, record that July inflation data were stronger than expected, particularly for market services. At the same time, the Middle East conflict had broadened, and domestic petrol and diesel prices were 13 per cent higher than had been forecast in August.

Two plausible explanations, then, sat side by side. RBA staff came down on one of them.

The staff verdict

According to the minutes, staff judged that the upside surprise more likely reflected domestic capacity pressures than pass-through of Middle East cost shocks.

In plain terms, staff concluded that the stronger-than-expected inflation was more about demand in the Australian economy pressing against what it can produce than about higher fuel and energy costs flowing through to other prices.

Governor Michele Bullock put the same view in her own words at the media conference on 29 September: "Inflation is too high and has been driven by domestic capacity pressures."

Several other details in the minutes sit alongside that judgement:

  • Market services: the July upside was concentrated in market services, a category where prices are typically set locally rather than on world markets.
  • Breadth: the share of items with prices rising by more than 2½ per cent was "well above average", which points to widespread price increases rather than a jump confined to fuel.
  • Labour costs: unit labour cost growth was above what is consistent with the inflation target, driven mainly by subdued productivity growth rather than strong nominal wages.

Staff also expected underlying inflation in the September quarter to be higher than had been forecast in August.

Why the distinction matters for interest rates

In general terms, monetary policy works by influencing demand. Higher interest rates tend to slow borrowing and spending, which eases pressure on the economy's capacity. That makes rate rises a more natural fit for inflation driven by domestic demand than for inflation driven by a supply shock overseas, which a central bank cannot directly control.

Bullock acknowledged the limits of the tool. "The bottom line is that productivity is doing nothing," she said, adding that "monetary policy can't do anything about productivity." With productivity weak, the economy's capacity to grow without generating inflation is constrained. "Productivity growth remains weak and the labour market remains a little tight," she said.

She also pointed to a channel through which rate rises can affect imported prices: "And raising interest rates impacts import prices." She added: "And then according to our research, in fact, the most important channel is the exchange rate channel."

The Board unanimously raised the cash rate target by 25 basis points to 4.60 per cent. Its statement said further tightening was warranted to return inflation to target in a reasonable period. Among the arguments for raising rates, the minutes list that upside inflation risks had materialised and that a timely response would best balance the Board's objectives.

The global shock has not gone away

Concluding that domestic pressures were the bigger driver of the July surprise does not mean the global shocks were irrelevant. The RBA's communications are explicit that they are adding to the picture.

  • The decision statement said some upside risks flagged in August were materialising, including a broader Middle East conflict and higher global energy prices.
  • The minutes record that global energy prices were significantly above the August assumptions.
  • Bullock said: "The conflict in the Middle East has escalated again in recent weeks, and oil prices have risen significantly."
  • She warned: "Disruptions to oil supply could last longer than anticipated".

Bullock was also blunt about the lasting effect of higher energy costs: "it's made us all poorer in this country. That is a fact." And: "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher."

A second global force is also at work. The statement cited AI-related demand pushing up technology goods prices, and Bullock said "the global AI investment boom has driven significant price rises for some inputs". She linked this back to the domestic economy: "The AI boom is also adding to demand in the Australian economy at a time when we already have capacity pressures."

Reading the numbers carefully

It is worth separating the measures involved. Monthly headline CPI was 4.0 per cent over the year to August 2026; headline CPI was 3.9 per cent over the year to the June quarter. The trimmed mean, an underlying measure that excludes the largest price rises and falls each period, was 3.6 per cent over the year to the June quarter, the same as the weighted median, while CPI excluding volatile items was 4.0 per cent. The target is 2 to 3 per cent, with a midpoint of 2.5 per cent.

Fuel price movements show up most directly in headline CPI. The staff judgement about domestic capacity pressures concerns the broader, more persistent component of inflation, which is what underlying measures such as the trimmed mean are designed to capture.

The bottom line

When July's inflation came in above expectations, RBA staff judged that domestic capacity pressures were the more likely cause, rather than the pass-through of higher fuel costs from the Middle East conflict. Strength in market services, broad-based price increases and unit labour cost growth above what is consistent with the target all fit that view. Global energy and AI-related pressures remain part of the picture, but the staff assessment helped frame the Board's September decision. The next CPI update is listed for 28 October, ahead of the 3 November decision. Readers wanting to understand what these trends mean for their own circumstances may wish to consult a licensed professional.