Hotter-than-expected inflation has raised expectations that the Reserve Bank of Australia (RBA) could deliver another interest rate hike as early as September, with housing costs continuing to be a key driver of price growth.

Three of the nation’s big four banks have revised their rate forecasts following the latest inflation figures. NAB now expects the RBA to increase the cash rate to 4.6 per cent when it meets in September, while also signalling that another hike could be required later in the year.

CBA and ANZ are forecasting a rate increase in November, while Westpac has retained its view that the RBA will remain on hold from here.

Inflation falls, but underlying pressure remains

Monthly inflation data released by the Australian Bureau of Statistics (ABS) on Wednesday showed the Consumer Price Index (CPI) rose 3.5 per cent in the 12 months to July, down from 3.8 per cent in June.

However, the decline in headline inflation was largely the result of a statistical effect. Large increases in energy prices recorded last year, following the end of government subsidies, have now dropped out of the annual calculation.

The result was also higher than expected. Economists had forecast a 3.3 per cent annual increase in the CPI ahead of Wednesday’s release.

Underlying inflation remained particularly concerning for economists and policymakers. Annual trimmed mean inflation, which removes the impact of temporary and volatile price movements, was unchanged at 3.6 per cent.

However, the trimmed mean rose 0.5 per cent over the month — the largest monthly increase recorded since the series began.

ANZ economist Madeline Dunk said the result suggested underlying inflation could exceed the RBA’s expectations for the September quarter.

“The result suggests trimmed mean inflation is likely to overshoot the RBA’s expectations for the third quarter,” she said.

Housing remains the biggest inflation driver

ABS head of price statistics Rachael McCririck said housing inflation was the largest contributor to annual price growth.

“Housing rose by 5% in the 12 months to July due to rising costs for new dwellings,” Ms McCririck said.

“New dwellings prices rose 5.7% in the 12 months to July as builders passed on higher costs for materials and labour.”

Housing inflation in the CPI does not include changes in home prices or mortgage repayments. Instead, it captures the cost of building new homes, rents and utilities such as water and electricity.

Housing costs are also typically more persistent than more volatile components of the inflation basket, including food, clothing and travel.

Angus Moore, senior economist at realestate.com.au, said continued inflation in rents and construction costs remained a significant risk for the RBA.

“Both are large components of the CPI, and so have a big effect on overall inflation, and tend to be quite persistent,” Mr Moore said.

“And both remain quite elevated, and well above the RBA’s target band.

“Neither showed much sign they are slowing down, with annual inflation in both basically unchanged between June and July, though the pace of rent growth has been slowing down.”

Building costs remain elevated

The cost of building a new house is now more than 50 per cent higher than it was at the end of 2019.

Mr Moore said construction cost growth had slowed substantially following the sharp increases experienced during the pandemic, but had begun accelerating again in 2026.

“Building cost growth had slowed right down after very strong growth during the pandemic, but has picked back up in 2026 on the back of global supply chain disruptions,” he said.

The persistence of elevated construction costs is likely to remain a concern for the RBA, particularly as higher costs are passed through to new home prices and contribute to broader housing inflation.

Rental market remains under pressure

The prospect of changes to negative gearing on established residential property has also prompted concerns about the potential impact on rents.

While some property industry professionals have warned that abolishing negative gearing could put additional pressure on rents, Mr Moore said rental markets had already been tight for an extended period.

“Rents in the CPI are still growing at above-average pace. That ongoing pressure in rents reflects tight conditions in rental markets and low vacancy rates, though, these have improved a little from where they were a few years ago,” he said.

“It’s still very early days for assessing how the budget is going to affect rental markets, and while investor purchases have slowed, they remain higher than they were a few years ago.”

Mr Moore said estimates suggested the impact of the proposed changes would probably not be large, although some markets could experience greater pressure.

“But there’s a risk that some areas, particularly those where vacancy rates are already low, see more pressure,” he said.

According to the ABS, rents rose 3.6 per cent over the year to July, unchanged from the annual increase recorded in both June and May 2026.

Fuel prices add to inflation pressure

Beyond housing, several other categories contributed to the latest inflation result.

Food and non-alcoholic beverages rose 3.2 per cent over the year, with consumers spending more on takeaway food. Transport prices increased 1.6 per cent, while recreation and culture rose 2.6 per cent, partly reflecting domestic travel during the school holidays.

Automotive fuel was another source of upward pressure.

“On a monthly basis, automotive fuel prices rose 7.5% in July after falling for three months in a row,” Ms McCririck said.

“This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July.”

RBA has left the door open to another hike

The latest inflation figures come just a day after the release of the minutes from the RBA’s August monetary policy meeting, which confirmed that another rate increase remains a possibility.

“The board will remain focused on its mandate to deliver price stability and full employment and will continue to do what it considers necessary to achieve that outcome, including increasing the cash rate target if upside risks materialise,” the minutes said.

The RBA’s forecasts indicate inflation is not expected to return to the top end of its 2–3 per cent target range until at least mid-2027.

That outlook, combined with the latest stronger-than-expected underlying inflation figures, has increased pressure on the central bank to consider further tightening.

Banks shift rate forecasts

NAB chief economist Sally Auld said the broad-based nature of the inflation increase meant two additional rate hikes could ultimately be required.

“We now expect the RBA to increase the cash rate by 25 basis points in September to 4.6%,” she said.

“The risk is biased towards an additional hike in November, especially if activity data shows resilience in coming months.”

CBA and ANZ have also moved towards a November rate hike, while Westpac remains the outlier among the big four banks, continuing to expect the RBA to leave interest rates unchanged.

With housing costs, rents and construction prices remaining elevated, the inflation data has reinforced concerns that the path back to the RBA’s target could be slower than previously expected — increasing the likelihood that Australian borrowers may face higher interest rates before the year is out.