The Q3 inflation surprise

The Q3 2025 inflation print surprised on the upside, with annual headline inflation once again exceeding the Government’s 2–3 per cent target band. The Government has downplayed the result as statistical noise, arguing that inflation remains on a trajectory towards the centre of the band. That may prove correct - very occasionally rogue prints happen - but the data are not yet conclusive. For now, the result makes it increasingly unlikely that the RBA will cut rates at its November 2025 meeting.

Although the core inflation measure favoured by the Reserve Bank of Australia - the trimmed mean - remained within the target range, its quarterly rise of 1 per cent was uncomfortably strong. This measure excludes the most volatile 30 per cent of price movements by weight, trimming out the largest rises and falls across 87 expenditure classes to capture underlying inflation trends.

We can look more closely at the fastest-growing expenditure classes to understand what is driving the headline result this quarter. Under the trimmed-mean methodology, roughly the 13 expenditure classes with the largest price rises would have been excluded. At the top of the list sits electricity, though this is in part an artefact rather than a signal. Several state-government electricity-bill subsidy schemes either expired or were scaled back during the quarter, resulting in a one-off jump in measured prices rather than a genuine surge in underlying energy costs.

Other notable increases included child care, following the partial unwinding of earlier fee caps; domestic travel and accommodation, reflecting seasonal demand; and tobacco, as scheduled excise increases took effect. When so many disparate items - from coffee and textiles to motor-vehicle services and household cleaning products - register solid gains in the same quarter, it indicates that price pressures are no longer isolated. This breadth of increases explains why the trimmed mean rose a full 1.0 per cent, signalling that underlying inflation momentum has picked up rather than faded.

For completeness, we can look at the other tail. Again, the trimmed mean measure would have excluded around the bottom 13 classes. 

Turning to the analytical series, we can see a clear uptick in services inflation, which was already proving sticky. Goods inflation has also firmed, with the last three quarterly prints sitting outside the range consistent with the 2–3 per cent target band. Taken together, these charts indicate that inflationary pressures are now broad based, spanning both goods and services components.

With the tradables and non-tradables split, the picture is similarly concerning. Tradables inflation - largely influenced by import prices and global supply conditions - has now recorded two consecutive quarters above the rate consistent with the target band, reversing the disinflation seen through 2024. This suggests that some global cost pressures are re-emerging, or that exchange-rate weakness is starting to feed through to consumer prices.

Meanwhile, non-tradables inflation remains elevated and sticky, reflecting persistent domestic cost growth in housing, utilities, and services. The annual rate of around 4 per cent underscores that local capacity constraints and wage pressures continue to dominate the inflation landscape.

Together, these trends point to a broadening of inflationary pressures, spanning both imported and domestic components - a mix that makes policy calibration more complex for the RBA.

While the recent data suggest that supply constraints are increasingly binding, it remains difficult to disentangle them from residual demand-side pressures. Inflation may be “sticky” partly because demand has normalised more slowly than expected, particularly in services, where labour-market tightness continues to support prices.

Equally, the persistence of non-tradables inflation amid moderating output implies a growing supply-side contribution: housing shortages, energy costs, and weak productivity growth are limiting the economy’s capacity to expand without generating inflation.

In short, Australia may be entering a hybrid phase - demand is no longer excessive, yet supply has not adjusted fast enough. That combination creates the appearance, and risk, of incipient stagflation, even if actual output growth remains positive for now. But to be clear, Australia is not experiencing stagflation; it merely faces a rising risk of moving in that direction. Nonetheless, this prospect complicates policymaking for the RBA: monetary tightening alone cannot expand supply, yet easing too soon risks validating entrenched inflation expectations.