Inflation moderates as margin challenges continue
Annual inflation eased to 3.5% in July, its lowest level since the energy crisis, although it remains above the RBA's target range.
If transport prices are excluded – to remove the effect of the fuel crisis – CPI sits at 3.7%, indicating broad-based price pressures.
Sticky inflation is expected to keep interest rates elevated through 2026-27, as the Reserve Bank balances the need to contain price growth against slowing economic activity.
This combination of high inflation and subdued growth is increasing pressure on business margins, particularly in industries with limited ability to pass rising costs on to customers.
Fuel shortages avoided, yet fuel costs remain elevated
Australia avoided widespread fuel shortages but faced a sharp rise in fuel costs. Prices surged in the early stages of the conflict before easing temporarily between April and July following the federal government's fuel excise reduction.
Since then, fuel prices have fluctuated in response to geopolitical developments and are likely to remain volatile until the conflict is resolved. Despite some moderation, prices remain around 50% above pre-conflict levels.
Higher fuel prices continue to squeeze fuel-intensive industries, particularly transport, manufacturing and construction, adding to broader cost pressures across the economy.
Labour market softens amid economic pressures
Australia’s labour market is weakening, with unemployment rising to 4.5% in July, higher underemployment, and fewer hours worked.
High inflation and RBA interest rate rises have reduced confidence and slowed economic activity. The labour market is expected to weaken further, while the RBA faces the challenge of balancing inflation control with growing unemployment.
Weak productivity growth is driving Australia’s economic challenges, contributing to high inflation, high interest rates, and a softer labour market.
Job mobility continues to decline
Declining job mobility is increasingly shaping labour market outcomes. The share of workers changing jobs has fallen from around 17% annually in the 1970s to just 7% last year.
Demographically this is driven by an ageing workforce, as older employees tend to move jobs less frequently.
But mobility has also declined within every age bracket, especially for younger employees. This points to a lower underlying tendency for employees to change jobs separate to the ageing effect.
Lower job mobility is contributing to recruitment challenges, worsening skills shortages and reducing productivity by slowing the movement of workers to roles where they are most needed.
Insolvencies above pre-pandemic levels
Business insolvencies reached 3,540 in the June quarter 2026 and 14,500 over the financial year, around 70% higher than pre-pandemic levels.
The main driver is weak economic conditions, with low growth, high inflation, and elevated interest rates placing significant pressure on businesses.
Construction remains the largest source of insolvencies due to rising costs and tight margins, while retail and accommodation & food services are being affected by weaker consumer spending.
Professional services and the care sector, historically low-insolvency industries, have also seen a sharp rise.
Datacentres boom, broader investment weakens
Business investment is increasingly operating at two different speeds, with datacentre construction booming while investment across most other industries slows. Investments in datacentres contributed 52% of total capital expenditure growth during FY2025-26.
In contrast, business investment outside the ICT sector has remained subdued, with growth easing through 2026 as weaker economic conditions and heightened uncertainty weigh on investment decisions.
This two-speed investment trend is expected to continue, with ICT remaining strong while industrial and consumer sectors lag.
