Key Highlights

  • The trimmed mean was 3.6% over the year to the June quarter of 2026, compared with 4.0% for headline CPI over the year to August.
  • The August forecasts had it staying at 3.0% in June 2027 and reaching 2.5% only in 2028.
  • Those forecasts were finalised before the September rise to 4.60%.

The RBA's August forecasts have underlying inflation, measured by the trimmed mean, staying at 3.0% in June 2027 and reaching the midpoint of the target only in 2028, a slow glide path that explains much of the Board's impatience.

When the Reserve Bank of Australia talks about how far inflation has to fall, it tends to point to underlying inflation rather than the headline CPI figure that grabs most of the attention. The trimmed mean is the underlying measure at the centre of that discussion, and its most recent reading was 3.6% over the year to the June quarter of 2026.

That compares with headline CPI of 4.0% over the year to August 2026, according to the monthly CPI. The two numbers measure different things, and confusing them leads to misreading what the RBA is worried about. This explainer focuses on the trimmed mean: what it is, where the RBA's August forecasts expected it to go, and why the Monetary Policy Board has been unwilling to wait for it.

What the trimmed mean strips out

Every quarter, the prices of the items in the CPI basket move by different amounts. Some jump sharply, some fall, and most land somewhere in between. Headline CPI averages all of them. The trimmed mean takes the same price changes, sets aside the most extreme movements at both ends, and averages what is left.

The purpose is to look through one-off spikes and slumps, such as a sudden jump in fuel prices, and focus on the broad, persistent trend. The two measures can diverge noticeably: in the June quarter of 2026, year-ended headline CPI was 3.9%, while the trimmed mean was 3.6%, a gap of 0.3 percentage points over the same period. That makes the trimmed mean a better guide to whether price pressures are spread across the economy or concentrated in a few items. It is also why Governor Michele Bullock's description of inflation running at "about 3.5 per cent for the past six months" refers to underlying inflation, not to the headline figure.

A half-year-by-half-year forecast

The August 2026 Statement on Monetary Policy (SMP), with forecasts finalised on 5 August and therefore before the September rate rise, set out this path for year-ended trimmed mean inflation:

  • 3.6% in the June quarter of 2026
  • 3.3% by December 2026
  • 3.0% by June 2027
  • 2.6% by December 2027
  • 2.4% in both June and December 2028

In the text, the RBA said trimmed mean inflation was expected to stay at 3.0% in June 2027 and decline to "the midpoint of the 2–3 per cent target range in 2028." The RBA targets inflation of 2–3%, aiming for the 2.5% midpoint.

Those forecasts assumed a cash rate of 4.3% in June 2026, 4.4% in December 2026 and 4.5% through 2027. The Board has since lifted the cash rate target to 4.60%, effective 30 September, so the actual policy setting is already higher than anything assumed in that forecast round.

The quarterly arithmetic behind the Board's concern

Annual figures can disguise what is happening quarter to quarter. The trimmed mean rose 0.8% in the June quarter of 2026 (seasonally adjusted). At her 29 September media conference, Bullock explained the significance: a quarterly pace of about 0.6% is consistent with inflation of roughly 2.5% a year, whereas recent readings had been 0.8 and 1.

That gap is the heart of the issue. If underlying prices keep rising at 0.8% or more each quarter, the annual rate does not fall towards the target in the way the forecasts envisaged. Bullock described underlying inflation as "a percentage point above our target", and said inflation had been outside the target for six years, apart from a brief return inside the range in 2025.

The minutes of the 28–29 September meeting add detail. The July monthly CPI was stronger than expected, particularly for market services, and RBA staff judged the underlying inflation surprise more likely reflected domestic capacity pressures than cost pass-through from the Middle East conflict. Members concluded that "inflation remained too high" and that developments "pointed to an increase in the risk of persistently elevated inflation."

Why "timely" matters as much as the destination

The trimmed mean forecast does reach the target's midpoint, but not until 2028. The Board's stated strategy is to return inflation to target "in a timely manner", and the minutes say it will consider "increasing the cash rate target further if required."

The time it takes for policy to work is part of the calculation. Bullock said the full effect of interest rate changes takes 12 to 18 months. The RBA's Assistant Governor (Financial Markets), Christopher Kent, made a similar point in August: "It takes some time for tighter monetary policy to have its full effect on economic activity and inflation."

There is also the question of expectations. According to the Board's statement, short-term inflation expectations are elevated. Bullock said the September rise was intended to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy". The longer underlying inflation lingers above 3%, the greater the risk that businesses and households come to treat it as normal.

Labour costs feed into the picture too. The minutes say unit labour cost growth is above the level consistent with the inflation target, driven mainly by weak productivity rather than strong wages. Bullock said plainly: "there is no wage price spiral going on in Australia."

The bottom line

The trimmed mean is the RBA's window on persistent, broad-based inflation, and it was 3.6% over the year to the June quarter of 2026, compared with 4.0% for headline CPI over the year to August. The August forecasts, finalised before the September rate rise, had it staying at 3.0% in June 2027 and reaching 2.5% only in 2028.

With quarterly readings of 0.8 and 1 against the roughly 0.6% pace Bullock linked to target-consistent inflation, the Board judged that a further tightening was warranted. The September CPI is scheduled for release on 28 October and the next cash rate decision is scheduled for 3 November. "Will it be enough? I don't know," the Governor said.

The August projection places trimmed mean inflation at exactly 3.0% in June 2027, not above 3% at that date. This is a forecast, not an observed inflation reading.