Key Highlights

  • The Board’s statement accompanying the September rise judged that short-term inflation expectations remain elevated.
  • Beliefs about future inflation can become self-fulfilling once they are embedded in prices and wages.
  • The RBA does not see a wage-price spiral, but its stated aim is to prevent high inflation becoming entrenched.

Among the reasons the Reserve Bank gave for lifting rates in September was a judgement that short-term inflation expectations remain elevated, a concern that goes to the heart of how inflation can become self-perpetuating.

When the Reserve Bank of Australia's Monetary Policy Board raised the cash rate target by 25 basis points to 4.60% on 29 September 2026, its statement ran through a list of pressures: global energy prices, conflict in the Middle East, AI-related demand for technology goods, and capacity constraints at home. Alongside those, the statement noted, in paraphrase, that short-term inflation expectations were elevated.

It is easy to skim past a line like that. Expectations are less tangible than petrol prices or rents. But for central bankers, what people believe inflation will be can matter almost as much as what it currently is, because those beliefs shape the decisions that determine future prices.

Beliefs that become prices

The logic is straightforward. If businesses expect their costs to keep rising quickly, they are more inclined to lift their own prices in anticipation. If workers expect living costs to keep climbing, they are more inclined to seek larger pay rises. Each decision is reasonable on its own, but together they can keep inflation high even after the original shock has faded.

Governor Michele Bullock framed the RBA's task in exactly those terms at her media conference. The aim, she said, was to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy".

The key word there is "embedded". A temporary rise in prices, such as a spike in fuel costs, is one thing. Inflation that people come to treat as normal, and build into contracts, wage claims and pricing plans, is harder to unwind. Bringing it down then typically requires a longer period of tighter policy, which means greater costs for borrowers and the wider economy.

Why the concern is sharper now

Several features of the current environment help explain why the RBA flagged expectations in September.

The first is duration. Bullock noted that inflation has been outside the 2–3% target band for six years, apart from a brief return inside it in 2025. The longer inflation stays above target, the more opportunity there is for households and businesses to adjust their expectations upward.

The second is the visibility of price rises. "Every household has seen how the price of everything has gone up in recent years," Bullock said. Prices that people see often, such as fuel, may loom large in perceptions. The minutes of the 28–29 September meeting recorded that domestic petrol and diesel prices were 13% higher than forecast in August. The statement, in paraphrase, also warned of higher fuel costs spreading to other goods and services, and Bullock cautioned that "Disruptions to oil supply could last longer than anticipated".

The third is the persistence of underlying inflation itself. Headline CPI was 4.0% in the year to August 2026, on the monthly measure. Underlying inflation, measured by the trimmed mean, was 3.6% over the year to the June quarter 2026. Bullock said underlying inflation had been "about 3.5 per cent for the past six months", or "a percentage point above our target". The minutes said developments "pointed to an increase in the risk of persistently elevated inflation."

Taken together, a long stretch above target, visible price rises in everyday items and sticky underlying inflation create the conditions in which expectations can drift.

What has not happened, at least so far

The RBA's assessment also contains reassuring elements. Bullock was firm that "there is no wage price spiral going on in Australia." The minutes said unit labour cost growth was above a level consistent with the target, but attributed that mainly to weak productivity rather than strong wages.

Indeed, Bullock pointed out that many workers have fallen behind. "They're seeing real wage cuts," she said. The August Statement on Monetary Policy, whose forecasts were finalised on 5 August before the September rate rise, projected Wage Price Index growth of 3.3% through to mid-2027, easing to 2.9% by December 2028. Its headline CPI forecasts were 3.6% for the year to December 2026 and 2.8% for the year to June 2027.

That combination matters for interpretation. Elevated short-term expectations are a warning sign, but the RBA has not described a situation in which wages and prices are chasing each other upward. The concern is about preventing that dynamic from taking hold rather than reacting to one already under way.

How the rate rise is meant to help

In general terms, raising interest rates can work on expectations in two ways. Directly, it slows demand, giving businesses less scope to pass on price increases. Indirectly, it signals the central bank's determination to bring inflation back to target, which can itself temper what people expect.

The Board's statement made that determination explicit: "The Board will continue to do what it considers necessary to bring inflation sustainably back to target". Bullock went further: "The Board will increase interest rates again if that's what's needed to get inflation down." The minutes said the Board aims to return inflation to target "in a timely manner" and will consider "increasing the cash rate target further if required."

At the same time, Bullock declined to commit to any path. "I'm not going to give you forward guidance," she said, adding of the September move: "Will it be enough? I don't know." She noted that the full effect of rate changes takes 12 to 18 months.

Her description of the end goal speaks directly to expectations. The RBA wants inflation back at 2.5%, the midpoint of its target, where, in Bullock's words, "people are not worrying about it". That is the essence of anchored expectations: inflation low and stable enough that it stops shaping everyday decisions.

The August forecasts, prepared before September's increase, had trimmed mean inflation staying at 3.0% in June 2027 and reaching "the midpoint of the 2–3 per cent target range in 2028". The next official read on prices comes with the September CPI, scheduled for release on 28 October, ahead of the Board's next decision at 2.30 pm on 3 November 2026.

The bottom line

The RBA's observation that short-term inflation expectations are elevated reflects a core central banking worry: that beliefs about future inflation can become self-fulfilling once embedded in prices and wages. After six years largely outside the target band, with fuel costs above forecast and underlying inflation around a percentage point too high, the Board cited it in the statement accompanying September's rate rise. The RBA does not see a wage-price spiral, but its stated aim is to prevent high inflation becoming entrenched.