Key Highlights

  • The RBA targets inflation of 2–3%, aiming for the 2.5% midpoint, which Bullock described as the level where people are not worrying about inflation.
  • Headline CPI was 4.0% over the year to August and underlying inflation 3.6% over the year to the June quarter.
  • The August forecasts, made before the September rise, did not have underlying inflation reaching the midpoint until 2028.

Describing what success looks like, RBA Governor Michele Bullock gave a destination that is as much psychological as statistical: inflation back at 2.5%, the point where "people are not worrying about it".

Most discussion of the Reserve Bank of Australia focuses on the cash rate, which the Monetary Policy Board lifted by 25 basis points to 4.60% at its 28–29 September 2026 meeting. But a rate is only a tool. The objective it serves is a number that rarely makes headlines on its own: 2.5% inflation.

At her media conference on 29 September, Bullock said she wants inflation back at 2.5%, where "people are not worrying about it". That framing says a lot about how the RBA thinks about inflation, and why it has been prepared to keep raising rates even as households feel the strain.

A band with a bullseye

The RBA's inflation target is a range of 2–3%. Within that range, the Bank aims for the 2.5% midpoint. The band gives some room for prices to move around from quarter to quarter, but the midpoint is where the Bank wants inflation to settle over time.

There is a practical reason for aiming at the centre rather than simply getting under 3%. If inflation hovers just inside the top of the range, any new shock, such as a jump in fuel prices, can quickly push it back outside. Settling near the middle leaves a buffer on both sides.

The RBA's August 2026 Statement on Monetary Policy (SMP) reflects that aim. Its forecasts, finalised on 5 August and therefore before the September rate rise, had underlying inflation, measured by the trimmed mean, declining to "the midpoint of the 2–3 per cent target range in 2028". Headline inflation was forecast to be "at or a little below the midpoint of the inflation target throughout 2028."

Getting back inside the band was expected to come well before reaching the bullseye. The same forecasts had headline inflation returning to the 2–3% range by Mid-2027, while the trimmed mean was expected to stay at 3.0% in June 2027. Those projections assumed a cash rate of 4.3% to 4.5% over the forecast period, below the 4.60% the Board has since set.

How far inflation has to travel

The current readings show the distance still to cover. Headline CPI was 4.0% over the year to August 2026, according to the monthly CPI. Underlying inflation, measured by the trimmed mean, was 3.6% over the year to the June quarter of 2026. Bullock said underlying inflation had been "about 3.5 per cent for the past six months", which she described as "a percentage point above our target".

She also translated the target into quarterly terms. A pace of about 0.6% a quarter is consistent with roughly 2.5% a year, she said, whereas recent readings had been 0.8 and 1. The trimmed mean rose 0.8% in the June quarter of 2026 (seasonally adjusted).

Time is part of the problem too. Bullock said inflation has been outside the target for six years, apart from a brief return inside the range in 2025. "Every household has seen how the price of everything has gone up in recent years," she said.

Why "not worrying" is the real goal

The phrase "people are not worrying about it" points to something central banks care about deeply: expectations. When inflation is low and stable, households and businesses tend not to factor it into everyday decisions. Prices, wages and contracts are set without much thought to how fast the cost of living will rise.

When inflation stays high for a long time, that changes. People begin to anticipate further price rises, and those expectations can feed into the prices businesses set and the pay rises workers seek. According to the Board's statement, short-term inflation expectations are currently elevated.

Bullock said the September increase was intended to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy". The minutes of the September meeting say developments "pointed to an increase in the risk of persistently elevated inflation."

In that light, 2.5% is less a magic number than a marker of a state of mind: inflation low enough that it fades into the background. The word "sustainably" in the Board's statement captures the same idea: "The Board will continue to do what it considers necessary to bring inflation sustainably back to target".

The cost of getting there

The Governor did not pretend the path to 2.5% is painless. "Now, I know this decision is difficult for households with a mortgage and businesses with loans," she said. On mortgage holders specifically: "Those who have mortgages, yes, this clearly impacts them and it hurts them."

She also pointed to the toll inflation itself has taken on workers: "They're seeing real wage cuts." Seen that way, the RBA's argument is that the pain of higher rates now is aimed at ending the broader pain of persistently rising prices.

The Board's stated strategy is to return inflation to target "in a timely manner", and it will consider "increasing the cash rate target further if required." Bullock said the full effect of interest rate changes takes 12 to 18 months, which means the September rise is expected to work through the economy over time rather than all at once.

How quickly 2.5% is reached remains uncertain. Asked whether the latest move would be enough, Bullock replied: "Will it be enough? I don't know." She also said: "I'm not going to give you forward guidance."

The bottom line

The 2.5% midpoint is the RBA's real destination, and Bullock described it in human terms: the rate at which people stop worrying about inflation. With headline CPI at 4.0% for the year to August and underlying inflation at 3.6% for the year to the June quarter, there is still ground to cover, and the August forecasts, made before the September rise, did not have underlying inflation reaching the midpoint until 2028.

The next markers are already scheduled: the September CPI on 28 October and the Board's next cash rate decision at 2.30 pm on 3 November. Neither outcome is known in advance.