Disinflation is being imported
The consumer price index (CPI) rose by 0.7% in the June quarter 2025, resulting in an annualised inflation rate of 2.1%. This marks the lowest in annual inflation since March 2021 quarter.
Traded goods inflation fell to 0.2% p.a. in June - its lowest in eight years outside the pandemic - while non-traded goods inflation remained steady at 3.1%.
This indicates Australia is now primarily importing lower inflation through cheaper traded goods. It also suggests that domestically-driven inflation remains high, with minimal progress over the last six months.
Recreation spending leads recovery
Household spending maintained its recovery momentum through the June quarter.
Both non-discretionary (4.3%) and discretionary (1.7%) spending grew in real terms during the quarter.
The result for discretionary spending is particularly significant, as it marks a reversal from the decline seen in the March quarter.
This recovery is mostly driven by the strong growth in recreation and culture (+7.9 %), likely supported by easing inflation, which is helping to restore consumer confidence.
Investment slump threatens productivity
Despite a surge in capex over the last two years, private sector reinvestment rates remain at 8.2% - much lower than their historical peak.
A shift in the composition of investment has also occurred. Building investment has held up, while machinery and equipment investment has weakened.
The consequence is that the Australian economy is not investing fast enough to match the growing workforce. This leads to a problem of ‘capital shallowing’, where the economy becomes more labour intensive. The Productivity Commission has identified low investment as a key contributor to Australia’s ongoing productivity slowdown.
Energy drives input cost surge
Energy costs have significantly contributed to manufacturing pressures, with the 2022 Ukraine conflict triggering a 43% spike in gas prices.
Even with the easing of global energy markets, manufacturing prices remain stubbornly high—still 40% above their 2019 levels.
This has pushed manufacturing input costs well beyond background inflation rates, crimping margins.
High gas prices have been particularly challenging for chemicals and metals manufacturers, both of which have experienced declining output since 2022.
Youth unemployment rising again
The unemployment rate decreased to 4.2%, matching expectations and easing previous month's figure of 4.3%. The rate aligns with the RBA’s recent forecast for the June quarter.
With minimal private sector job creation over the past two years, employment growth has relied heavily on publicly funded sectors.
Although overall unemployment has declined, signs of labour market fragility remain—particularly the uptick in youth unemployment, which is once again nearing 10%.
Wage sustainability requires productivity
According to ABS data, wages in Australia rose by 3.4% p.a. in the June quarter, while consumer inflation was 2.1%, indicating a notable increase in real wages.
Private sector wages rose 0.8% in Q2, up 3.4% p.a., while public sector wages increased 1.0% in the quarter, reaching 3.7% annually.
The continued growth in real wages is encouraging for Australia; however, its sustainability depends on promptly addressing the nation’s productivity challenges.
The RBA’s August Statement on Monetary Policy highlights that long-term real wage growth depends on productivity improvements. Without such gains, strong wage growth risks fuelling inflation and diminishing real income benefits.
