Aussie mortgage holders on edge as inflation comes in higher than expected at 3.5 per cent

Australian mortgage holders are bracing for another potential interest rate rise after July inflation came in higher than forecast at 3.5 per cent. 

Australian Bureau of Statistics data released on Wednesday showed headline inflation, as measured by the Consumer Price Index (CPI), eased from 3.8 per cent in the 12 months to June 2026 to 3.5 per cent in the 12 months to July. 

However, the result is significantly higher than the 3.2 per cent projected by economists and remains above the Reserve Bank’s target band of 2 to 3 per cent. 

The trimmed mean – the Reserve Bank of Australia’s preferred measure – held at 0.8 per cent in July and 3.6 per cent on an annual basis.

This disappointingly came in above expectations for a fall to 3.5 per cent. 

AMP chief economist Shane Oliver said Wednesday’s inflation figures were ‘way too high’ and reinforced the case for another interest rate hike.

He argued the drop in annual inflation painted a misleading picture because it was mostly driven by a notably high inflation reading from a year earlier dropping out of the calculation, rather than a real easing in price pressures. 

‘Annual CPI inflation only fell because of the very high monthly rise a [year] ago dropping out of the [year-on-year] calculation,’ Mr Oliver said.

Oliver warned the latest figures showed underlying inflation remained stubbornly strong, bolstering the case for further action from the Reserve Bank.

The largest contributors to annual inflation were housing (+5 per cent), food and non-alcoholic beverages (+3.2 per cent) and recreation and culture (+2.6 per cent).

‘New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour,’ ABS head of price statistics Rachael McCririck said.

Fuel prices rose 7.5 per cent in the month after falling for three months in a row.

‘This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July,’ Ms McCririck said.

Food and non-alcoholic beverages were also strong contributors in the month, rising 3.2 per cent, as well as recreation and culture, which rose 2.6 per cent.

The data followed concerns that a significant pay rise for low-paid workers would add pressure to a category of inflation data closely watched by the Reserve Bank of Australia. 

From 1 July, workers on award wages received a 4.75 per cent boost to their pay packets, which could lead to a rise in market services inflation. 

Market services inflation, which tracks the cost of everyday services such as eating out, haircuts, insurance and recreation, has eased in recent months.

However, economists warn the Fair Work Commission’s latest wage decision could cause these prices to start rising more quickly again. 

‘Domestic market services inflation may prove stronger than we have accounted for given the larger-than-expected minimum wage decision amid existing pressures for businesses including from retail rents and utilities,’ Mr Smirk and Ms Sharma said.

Minutes from the RBA’s August board meeting, released on Tuesday, showed board members were particularly concerned about elevated market services inflation. 

The minutes said this could reflect capacity pressures and the pass-through of higher costs stemming from the conflict in the Middle East. 

Part of the reason the board considered raising interest rates at its previous meeting was the risk that the conflict could cause oil prices to stay elevated and businesses could pass more costs on to consumers than assumed.

The addition of 16 cents to the fuel excise at the start of the month, combined with higher oil prices linked to renewed conflict in the Middle East, was forecast to drive a 5.1 per cent rise in automotive fuel prices following a 10.9 per cent fall in June, Mr Smirk and Ms Sharma said.