Inflation eases, but further price pressures loom
The annual inflation rate moderated to 4.0% in May, the lowest level in three months but still above the RBA’s target range. However, underlying inflation continued to climb, reaching 3.6%, the highest level since 2024.
Current CPI readings indicate household transport costs and broader industry effects are yet to flow through.
The RBA and Treasury expect CPI to peak at around 5% in mid-2026 and return to normal by mid-2027, though inflation could be higher and more persistent if energy market disruptions continue.
Energy supply has not yet normalised
Despite recent diplomatic progress, energy flows from the Gulf remain heavily disrupted. The World Trade Organization shipping data shows little improvement in movements through the Strait of Hormuz, with only limited oil and LNG exports departing in recent weeks.
Policy measures, including strategic reserve releases, have helped soften the supply shock but are not a long-term solution. Meanwhile, restoring infrastructure and rebuilding fuel, fertiliser and chemical supply chains is expected to take months.As a result, the energy crisis is likely to persist, with ongoing impacts on economic activity in Australia and globally.
Fuel costs ease, but diesel remains a concern
Australian fuel prices are improving, but the outlook is uneven. The fuel excise reduction was halved on 1 July, adding 16c/L to prices, with a further 16c/L increase expected when the remaining excise relief ends on 1 August.
Petrol prices have fallen back to pre-conflict levels (~$1.60/L), but diesel remains around 15% higher (~$1.85/L). Both fuels are likely to rise by about 10% in August as the excise relief expires.
Underlying trends are diverging - petrol prices have eased while diesel has started to increase again due to disruptions in the Strait. With diesel a key cost for industry and transport, inflationary pressures have yet to subside to pre-conflict levels.
Mounting cost pressures on businesses
According to ABS data, almost half of Australian businesses (46%) reported higher operating expenses, driven mainly by rising overheads (65%) and staffing costs (40%).
Small businesses were disproportionately affected, reporting notable increases in overhead and staffing costs. Around one in seven small businesses expected to seek financial or advisory support, while 13% already required financial or advisory assistance.
More than half of businesses (58%) changed their operations due to fuel-related challenges, and around one in six (15%) responded by increasing prices.
Labour constraints easing, still tight
According to the ABS, the new u-series dataset measures three forms of labour underutilisation: people who are unemployed, employed people who would like to work additional hours, and employed people whose hours have been reduced.
Prior to the pandemic, spare labour capacity was about 7%, rising sharply during lockdowns before falling to 4.5% during the recovery. It has risen to around 5.5% as economic growth has slowed. Despite this lift, labour market spare capacity remains well below pre-pandemic and historical levels, contributing to ongoing workforce shortages reported by employers.
Rising compensation costs in Australia
Workers’ compensation costs have risen across all Australian industries over the past decade, increasing from 1.54% in FY2014-15 to 1.89% in FY2024-25.
Agriculture continues to have the highest workers’ compensation costs, reaching 4.30% of wages, followed by transport and public administration.
In contrast, professional services (0.74%) and education (1.08%) remain the lowest compensation cost sectors.
The broad-based increase across industries suggests growing pressures from higher claims costs, medical expenses, and insurance premiums, adding to labour costs for Australian employers.
