The Reserve Bank of Australia says inflation remains too high and the risk of further price pressure is still tilted to the upside, setting up another difficult monetary-policy decision when the Board meets later this month.

Governor Michele Bullock told a parliamentary economics committee that the cash rate has already been lifted by 75 basis points this year as the Bank tries to bring inflation back toward its 2 to 3 per cent target.

The cash rate is currently 4.35 per cent. The next Monetary Policy Board decision is scheduled for 29 September.

The RBA has not pre-announced that it will raise rates at that meeting. Its position is that it will assess incoming data and decide whether the tightening already delivered is sufficient to return inflation to target in a reasonable period.

That distinction matters because economists and financial markets may form expectations about the next move, but only the Board can make the official decision.

Australia’s latest Consumer Price Index data show annual inflation was 3.5 per cent in July, down from 3.8 per cent in June. Trimmed mean inflation, which the RBA uses as one measure of underlying price pressure, was 3.6 per cent.

Both measures remain above the top of the 2 to 3 per cent target range. The RBA’s August forecasts suggested inflation would not return to around the midpoint of that target until late 2027.

The Bank says some of the inflation risks it identified in August now appear to be materialising. Global energy and input costs remain one concern, while the RBA is also watching price pressure linked to strong demand for technology used in the global artificial-intelligence investment boom.

Oil prices are especially important because higher energy costs can pass through quickly to petrol, freight and business expenses. The RBA has said firms are reporting higher input costs and that the key question is whether those increases remain temporary or become embedded in broader price and wage setting.

The Bank is also watching extreme weather and other supply disruptions that can affect food, energy and commodity markets.

Domestically, weak productivity growth remains a structural constraint. If the economy cannot increase the amount of goods and services it produces efficiently, stronger demand can translate into inflation more quickly.

That creates a difficult trade-off. Higher interest rates can slow spending and reduce inflation pressure, but they also increase mortgage repayments and can weaken household consumption, housing activity and business investment.

The RBA says the economy has begun to slow and that labour-market conditions have eased gradually. It also says the full impact of the rate increases already delivered this year has not yet been felt because monetary policy works with a lag.

That lag is one reason the September decision is not automatic. If the Bank raises rates too much, it risks unnecessarily weakening activity and employment after earlier increases are still flowing through the economy. If it does too little and inflation remains persistent, it may need a stronger response later.

Housing is one area where the effect of tighter financial conditions is already visible. The RBA says prices have softened in most capital cities and new housing lending has declined.

At the same time, the Bank notes that dwelling prices are still much higher than they were before the pandemic and that structural housing undersupply remains an important factor supporting prices over the longer term.

For mortgage holders, the immediate issue is whether the current 4.35 per cent cash rate is the peak for this cycle or whether another increase is needed. The RBA has deliberately avoided making that commitment in advance.

For renters and households without mortgages, interest rates still matter through employment, business activity, housing construction and the broader cost of credit, even though the direct monthly repayment effect is different.

Inflation itself also has uneven effects. Essential categories such as housing and food remain major contributors to annual price growth, meaning households cannot always respond by simply delaying spending.

The latest ABS data show housing prices within the CPI basket rose 5.0 per cent over the year to July, while food and non-alcoholic beverages rose 3.2 per cent.

The RBA’s challenge is therefore not simply to reduce one headline inflation number. It is trying to stop elevated price growth from becoming persistent while avoiding an unnecessary downturn.

Governor Bullock has acknowledged that higher interest rates are difficult for people with mortgages, particularly when they are already dealing with cost-of-living pressure. The Bank’s argument is that allowing inflation to stay high would impose a broader and more lasting cost.

Markets will now focus on the data and commentary available before the 29 September meeting. New information on inflation expectations, employment, household spending and global commodity prices could all influence the Board’s assessment.

The July inflation data show why the Board remains cautious even though the headline rate eased from June. Non-tradable inflation — the part more closely linked to domestic costs and services — was 4.4 per cent over the year, while services inflation was 3.7 per cent. Those measures can be slower to fall than prices for internationally traded goods.

Housing remained the largest contributor to annual inflation. The ABS reported housing prices in the CPI basket were 5.0 per cent higher than a year earlier, with new dwelling prices up 5.7 per cent as builders passed on higher labour and materials costs.

Food and non-alcoholic beverages rose 3.2 per cent over the year, while meals out and takeaway prices increased 4.5 per cent. These categories matter for household perceptions of inflation because they involve frequent spending that is difficult to avoid completely.

Transport inflation was lower at 1.6 per cent annually, but petrol prices rose sharply in July after several months of declines. The ABS said automotive fuel prices increased 7.5 per cent in the month, reflecting higher world oil prices and the partial unwinding of federal fuel-excise relief.

That is the type of supply-side development the RBA has to interpret carefully. A central bank cannot produce more oil, food or building materials by changing interest rates, but it can try to prevent one-off price shocks from spreading into broader wages, margins and inflation expectations.

The Bank is therefore watching whether businesses absorb higher input costs or pass them through, and whether workers and firms begin setting wages and prices on the assumption inflation will remain above target for longer.

Wages data provide another piece of the picture. The ABS Wage Price Index rose 3.2 per cent over the year to the June quarter. Wage growth at that pace is not automatically inconsistent with the inflation target, particularly if productivity improves, but weak productivity makes the balance harder because businesses have less output growth to offset higher labour costs.

The RBA has repeatedly emphasised that monetary policy works with long and variable lags. A household on a variable mortgage can feel a rate rise relatively quickly, but the full effect on spending, hiring, investment and prices can take many months.

That timing problem is central to the September meeting. The Board has already raised the cash rate by 75 basis points during 2026. If those moves are still flowing through household budgets, a further increase could amplify a slowdown that is not yet fully visible in current data.

On the other hand, waiting too long carries its own risk if underlying inflation remains around the mid-3s and businesses begin treating that pace as normal. The Bank’s objective is to bring inflation back to target while preserving as much employment and economic activity as possible.

The housing market adds another complication. Higher rates generally reduce borrowing capacity and can slow demand, but Australia’s housing shortage can keep prices and rents under pressure even when finance becomes more expensive.

That means the RBA cannot solve housing affordability with interest rates alone. Planning, land release, infrastructure, construction capacity, taxes and population growth all influence the supply-demand balance.

For borrowers, the cash rate is also only the starting point. Banks decide how much of an RBA move to pass through to variable mortgages, deposits and business loans, and households differ widely in debt size and refinancing options.

Renters are affected differently but not insulated. Higher rates can slow new construction or increase landlords’ financing costs, while inflation in utilities, insurance and maintenance can add pressure to rents over time.

The next CPI release is scheduled for 30 September, one day after the RBA’s next decision. That means the Board will not have August CPI data when it meets, increasing the importance of the July figures, business liaison, labour-market data and other indicators already available.

The most accurate conclusion before 29 September is therefore that the Board faces a genuinely live decision. Inflation has eased from its recent peak but remains above target, domestic price pressure is still elevated and earlier rate rises are continuing to work through the economy.

What is clear now is that the RBA does not consider the inflation problem solved. Rates are already restrictive, growth is slowing and housing has softened, but the Bank still sees enough upside inflation risk to keep every option open at its next meeting.