Economic conditions: RBA’s statement on monetary policy for February 2026.

The current economic conditions in Australia have experienced a shift since mid-2025. Underlying inflation, which had been gradually easing from its peak in late 2022, unexpectedly rose to 2.7 per cent in the June quarter of 2025, indicating a decrease in capacity pressures due to a prior period of restrictive monetary policy balancing out aggregate demand and potential supply. Although GDP growth had shown signs of improvement, it was still below the estimated potential growth rate, suggesting further easing in capacity pressures. However, recent evidence has revealed significant changes in the economic landscape.

Inflation in the December quarter of 2025 exceeded previous forecasts, with trimmed mean inflation reaching 3.4 per cent over the year and headline inflation rising to 3.6 per cent. This uptick was observed across various sectors, including services, goods, and new dwelling inflation. The surge in economy-wide capacity pressures, possibly underestimated before and intensified in the latter part of the year, played a role in this inflation increase, with factors like price volatility and sector-specific demand contributing to the rise. It is suggested that temporary influences may have suppressed inflation in late 2024 and early 2025, thereby masking underlying inflationary pressures.

Private demand growth in the second half of 2025 was notably stronger than anticipated, leading to GDP growth surpassing expectations. Increased housing prices, a surge in dwelling investment, higher household income growth, and enhanced investments related to data centers and favorable financial conditions domestically and internationally contributed to this robust growth. Additionally, global economic activity outperformed predictions, with strong domestic demand in the US and East Asia and subdued GDP growth in other advanced economies. Core inflation remained high in many advanced nations due to persistent services inflation, while labor markets gradually loosened. Chinese GDP growth met targets supported by exports, although investment remained weak despite policy stimulus announcements.

The unexpectedly strong GDP growth in Australia accentuated existing capacity pressures, reflected in stable unemployment rates and tight labor market conditions. Firms reported challenges in finding suitable labor, leading to strong unit labor cost growth. Moreover, increased capacity utilization and elevated output price inflation indicated broader capacity pressures beyond the labor market. Nevertheless, estimates suggest that there was more excess demand in the economy throughout 2025 than previously anticipated, highlighting potential risks moving forward.

The spike in private demand growth and inflation in the latter part of 2025 is primarily attributed to sector-specific factors that may not persist. Consumption growth, which outpaced durable goods price inflation, could slow down this year, potentially affecting inflation. Similarly, the resurgence in housing demand led to a sharp increase in new dwelling inflation, possibly a short-term effect as residential builders adjust to market conditions. Despite these challenges, continued monitoring and assessment of economic conditions will be crucial in navigating the evolving economic landscape in Australia.