Q2 CPI slows to 2.1%, near bottom of RBA’s target range

Australia’s inflation rate cooled to its lowest level since March 2021 in the second quarter, strengthening expectations for a Reserve Bank of Australia (RBA) rate cut at its August meeting.

Headline CPI rose 2.1% year over year, down from 2.4% in Q1 and just below the 2.2% expected by economists. That puts it close to the lower bound of the RBA’s 2%-3% target range. On a quarterly basis, prices rose 0.7%, slower than both forecasts and the prior quarter.

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Drivers of the Slowdown

• Biggest increases: Housing, food & non‑alcoholic beverages, health
• Offsetting factor: Decline in transport costs
• Underlying trend: Trimmed mean inflation also eased, signaling broad disinflation

RBA Governor Michelle Bullock recently warned that headline CPI could edge back toward the top of the target range in late 2025 and early 2026 as temporary cost‑of‑living relief fades.

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Policy Implications

The RBA has already cut rates twice this year (each by 25 bps) from a 12‑year high of 4.35%. The cash rate currently stands at 3.85% after the central bank paused in July.

Market consensus now points to an August cut:

• Bank of America: “Weaker global growth backdrop and rising unemployment to 4.3% boost conviction in a cut.”
• Commonwealth Bank of Australia: Inflation reading “rubber stamps” an August move.

Some economists, including AMP’s My Bui, see as many as four more cuts by mid‑2026, potentially taking the policy rate to 2.85%.

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Economic Backdrop

Australia’s Q1 GDP growth disappointed:

• +1.3% YoY (vs 1.5% forecast)
• +0.2% QoQ (vs 0.4% expected)
• Weakness came from falling public spending, soft consumer demand, and sluggish exports.

With growth momentum slowing and inflation easing, the case for policy easing is strong — though the RBA will watch labor market trends closely.