Inflation is proving more stubborn in Australia than elsewhere, making the RBA’s job harder

For most of 2026, inflation has remained more persistent in Australia than in similar economies, and the Reserve Bank has been hiking interest rates more aggressively than other central banks. Australian households have been feeling the pain.

Official figures measure both the headline rate or consumer price index (CPI), which includes goods and services typically consumed by a household, and underlying inflation. Underlying inflation excludes unusually large price movements and can give a clearer picture of longer-term price pressures.

Underlying inflation remains higher in Australia than in the United States, the United Kingdom and Canada. In those countries, it has fallen closer to 2–2.5%. In Australia, underlying inflation as measured by the “trimmed mean” has remained around 3.5–3.6%.

This helps explain why the Reserve Bank of Australia has taken a tougher approach to interest rates than some overseas central banks. The RBA has raised rates five times this year versus just one increase in the US and the UK in the past two years.

Australia has not consistently recorded the highest headline inflation rate among advanced economies recently, though. At times in 2025, the UK and US had higher headline inflation.

However, inflation has proved more persistent in Australia in late 2025 and 2026. This period has coincided with rapid growth in investment in data centres.

Why is inflation staying higher?

Immediately after the pandemic, inflation was driven by a strong rebound in consumer demand, which pushed up prices.

More recently, however, “supply constraints” are playing a larger role. Supply constraints occur when businesses face higher costs or shortages. When supply cannot keep pace with demand, prices tend to rise.

One example is housing. Australia does not have enough homes to meet population growth. This has pushed up rents and construction costs.

Energy is another factor. The conflict in the Middle East pushed up oil prices, making fuel more costly for businesses and consumers. Electricity and gas also remain expensive.

Labour shortages have added pressure. Many businesses are struggling to find skilled workers. Higher labour costs can then flow through to consumer prices.

Inflation from a range of sources

Another driving force behind inflation in the past year is the surge in investment in data centres and digital infrastructure. This has lifted demand for energy, construction materials, construction workers and skilled labour.

These investments should improve productivity over time. In the short term, however, they can increase demand for scarce resources. This may add to inflationary pressures and make inflation slower to fall.

Some economists also argue that high state and federal government spending has added to inflationary pressures. Indeed, higher public spending has supported demand and added to inflationary pressures when the economy was already operating near capacity.

Higher interest rates can’t solve every inflation problem

The Reserve Bank’s main tool is the cash rate. When the RBA lifts the cash rate, borrowing becomes more expensive. Households spend less, businesses invest less and economic activity slows.

Read more: Mortgage holders aren’t alone in paying for rate hikes. Here’s how the RBA spreads the pain

This approach works best when inflation is driven by strong spending.

It is less effective when inflation stems from shortages and rising input costs for businesses, as we are facing now.

Higher interest rates cannot help to build more homes amid a shortage of supply. They cannot generate more electricity or train skilled workers. Nor can they reduce geopolitical tensions from the war in Iran.

Research from the International Monetary Fund and the European Central Bank highlights this challenge.

When inflation is driven by supply disruptions, raising rates too much can slow growth sharply and increase unemployment. Yet doing too little can allow inflation to persist. This is the dilemma facing the RBA.

Australia’s housing finance system makes interest rate changes especially painful for mortgage holders. Most Australian borrowers have variable-rate mortgages. This means repayments usually increase soon after the Reserve Bank raises the cash rate. This happens more quickly than in many advanced economies, where homeowners have fixed mortgage rates.

What governments can do

Many of today’s inflation pressures stem from shortages and supply constraints.

That means the federal government and states have a role alongside the Reserve Bank. The focus of the federal and state governments needs to shift from reducing public spending to increasing the economy’s ability to produce goods and services.

The Organisation for Economic Co-operation and Development (OECD) highlights several options for governments to help ease supply pressures:

• building more housing

• investing in energy generation and electricity networks

• improving workforce skills

• helping more people participate in the workforce

• reducing barriers to business investment

• improving productivity through infrastructure and regulatory reform.

Productivity means producing more goods and services with the same resources. When productivity improves, businesses can grow without raising prices as quickly.

Many economists also argue that government spending decisions can support efforts to reduce inflation. Slower growth in public spending may help ease price pressures when the economy is already operating close to capacity.

It’s not just the RBA’s job

Australia’s inflation problem has evolved since the pandemic.

However, the main pressure factor appears to be supply constraints. That means interest rate increases can only do part of the job. They can slow private spending, but they cannot create more housing, more energy supply or more skilled workers.

Last week, when the RBA raised interest rates for the fifth time this year, it also pushed out its forecasts for getting inflation back into its 2–3% target band until late 2027.

So returning to this target may require not only RBA rate moves, but also broader reforms to increase supply, instil budget discipline, and boost productivity across the economy.

Read more: What exactly is inflation, and are interest rates the only option for dealing with it?