Australia's Inflation Now Seen Hitting 4.25% Peak by Mid‑2026

Inflation is easing faster than the government predicted, but the Treasurer is not celebrating yet. Lower crude oil costs and advancements in diplomatic efforts in the Middle East have helped cool price pressures. Still, one key measure of inflation remains stickier than expected.

The New Inflation Forecast

That is lower than the 5% peak the Treasury had forecast earlier for the June quarter.

The improvement stems from lower crude oil costs and developments in Middle East peace talks, which have accelerated the decline, Chalmers told the Insiders program on Sunday. Chalmers said, "We desperately need the ceasefire to stick. "We can't have another false dawn when it comes to the Middle East and particularly the Strait of Hormuz"."

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Based on Treasury data in the May Federal Budget, the Treasurer anticipates headline inflation will drop to 2.5% by mid‑2027.

Underlying Inflation Stays Above Forecasts

The Australian Bureau of Statistics reported that the annual underlying inflation rate - a measure that strips out volatile items like food and fuel, also called the trimmed mean - was 3.6%. That was higher than the 3.5% economists had expected. Chalmers noted that the economy still has "more inflation than we would like" because of uncertainty in the Middle East. But he added, "We are making more progress than we anticipated." The Treasurer declined to give a new official forecast for underlying inflation, saying it is also moving "ahead of schedule." The Treasury will update its full set of inflation forecasts mid‑year.

The Reserve Bank of Australia has already raised its cash rate - the interest rate it controls - three times this year, reaching 4.35%. At its June meeting, the bank paused further increases. That pause suggests policymakers want to see how the lower oil prices and ceasefire talks play out before tightening again.

What to Watch

The main risk is the Middle East. Chalmers stressed the need for the ceasefire to hold, warning against another false dawn. The Treasury's updated forecasts mid‑year will show whether the downward trend can hold. For now, inflation is cooling, but not fast enough for the Reserve Bank to cut rates.

Meanwhile, with the cash rate at 4.35%, households face continued pressure from higher mortgage costs. The RBA has indicated it will monitor upcoming data closely before any further moves, balancing the need to contain inflation against the risk of slowing economic growth.

This latest inflation reading means Australian consumers have seen some relief at the petrol pump, but grocery and rent costs remain elevated. The government's budget assumptions relied on inflation easing, and any prolonged stickiness could force a rethink of planned spending on housing and energy relief.

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