Key Highlights

  • The RBA forecasts headline CPI Inflation to peak at 4.5 per cent in the December quarter.
  • The peak comes during the current quarter, before inflation starts to ease.
  • Higher energy prices linked to the Middle East conflict have contributed to the peak.
  • Inflation is forecast to stay above 3 per cent for the coming year.

The RBA's November forecasts include an uncomfortable message: headline inflation is expected to rise further in the near term. The RBA forecasts headline CPI inflation of 4.5 per cent over the year to the December quarter 2026. That is the quarter now under way, and the forecast is the peak in the RBA's projections.

In August, the RBA had forecast 3.6 per cent for the same quarter. The 0.9 percentage point upgrade is the largest revision in the RBA's headline inflation table.

The forecast path, measure by measure

The RBA forecasts both headline CPI and the trimmed mean, its preferred measure of underlying inflation. Both are year-ended, and August forecasts are shown in brackets.

Headline CPI (RBA forecasts):

  • June 2026: 3.9 (3.9)
  • December 2026: 4.5 (3.6)
  • June 2027: 3.7 (2.8)
  • December 2027: 2.7 (2.6)
  • June 2028: 2.5 (2.4)
  • December 2028: 2.4 (2.4)

Trimmed mean (RBA forecasts):

  • December 2026: 3.6 (3.3)
  • June 2027: 3.5 (3.0)
  • December 2027: 2.9 (2.6)

The headline path rises sharply and then falls. The trimmed-mean path is flatter. It stays in the mid-3s into 2027 and then eases. On these forecasts, headline inflation reaches the midpoint of the 2–3 per cent target range in mid-2028.

Why headline is set to spike

The main reason for the headline jump is energy. The SMP says higher energy prices from the Middle East conflict have added to pressures, and the Monetary Policy Board's statement notes that "The Middle East conflict remains unresolved".

The RBA's oil assumptions show how much has changed. Its oil price assumption for the December quarter 2026 is 35 per cent higher than in August. Its Brent Crude assumption for December 2026 is US$109.5 a barrel. It assumes prices fall to US$95.3 by June 2027, US$86.9 by December 2027 and US$79.1 by December 2028.

Refined fuel margins also matter. The RBA assumes they return to historical averages by mid-2027, about two quarters later than it assumed in August. Energy cost pressures are expected to ease from mid-2027, but by less than the RBA expected in August.

Headline CPI includes volatile items like fuel. The trimmed mean removes the largest price movements in either direction. That is why an energy shock lifts headline inflation more than underlying inflation.

The forecasts start from these figures. In the September quarter, headline CPI inflation was 3.9 per cent year-ended, unchanged from the June quarter. Trimmed-mean inflation was 3.7 per cent year-ended and rose 1.0 per cent in the quarter, up from 0.8 per cent in the June quarter.

The monthly CPI is a separate series, and it showed headline inflation of 4.3 per cent in the year to September 2026. This monthly figure should not be confused with the 3.9 per cent quarterly figure or the 4.5 per cent December quarter forecast.

Governor Michele Bullock gave some longer-term perspective in Senate testimony on 28 October: "Inflation fell significantly from its peak of 7.9 per cent at the end of 2022". She added: "Recently, inflation has been around 3½ to 4 per cent in year-ended terms."

Why the "better" part is not guaranteed

The easing in 2027 depends on assumptions that may not hold.

Oil. The forecasts assume oil prices fall over time. In an SMP scenario where crude stays around US$100 a barrel with elevated refined product prices, underlying inflation is around 2¾ per cent by end-2028 instead of about 2½ per cent.

Expectations. The Board's main concern is that a temporary spike could become something longer-lasting. The majority judged "there is an increasing risk that higher inflation expectations will become embedded." If people and businesses come to expect higher inflation, it can feed into wage and price setting. The RBA has revised its WPI forecast higher, to 3.4 per cent for December 2026, partly reflecting inflation expectations.

AI-related demand. The SMP flags strong AI-related Investment as an upside risk that could keep global growth and inflation higher and add to domestic capacity and construction cost pressures.

The cash rate path. The forecasts assume a cash rate path based on market pricing as at 28 October 2026. That path implies a rise of about 35 basis points by mid-2027. It is an assumption, not an RBA promise.

There is also a downside case. Inflation could fall faster if higher rates and falling housing prices weigh on spending. The RBA judges domestic inflation risks to be skewed to the upside overall.

Why the Board raised rates into a peak

If headline inflation is about to peak because of energy prices, why raise rates now? The Board's reason focuses on how broad inflation is, not just energy. "Inflation remains elevated and recent data indicate that it is broadly based," the Monetary Policy Board's statement says. It adds that "the data have confirmed that underlying inflation remains broadly based."

So the Board's concern is not just the energy-driven spike. It is that inflation is spread across many prices and could become embedded. Six members voted to raise the cash rate to 4.85 per cent. Three voted to hold at 4.60 per cent, and the statement gives no reasons for their view.

The RBA acknowledges the cost. "The economy is slowing," the statement says, and Unemployment is projected to rise more than expected in August.

The bottom line

The RBA expects headline inflation to get worse before it gets better. It forecasts a peak of 4.5 per cent in the current December quarter, driven largely by energy prices, followed by a decline to 2.7 per cent by December 2027 and the target midpoint in mid-2028. Underlying inflation is forecast to ease more slowly from 3.6 per cent. These are RBA forecasts, and they depend on oil prices, inflation expectations and an assumed market rate path. The next CPI release on 25 November will be the first test.