Reserve Bank raises inflation outlook as unemployment is forecast above 5 percent by 2028

Inflation in Australia remains well above target and a number of upside risks have crystallised since August, according to the Reserve Bank of Australia's November Statement on Monetary Policy. Headline inflation was 3.9 per cent over the year to the September quarter and the trimmed mean 3.7 per cent, with sizeable price increases across a range of market services. The bank now expects both headline and underlying inflation to remain above 3 per cent until the end of 2027, later than forecast in August, and to return to 2.5 per cent, the midpoint of the target range, only in mid-2028. Consumer price inflation is forecast to peak at 4.5 per cent in the year to December.

The published overview contains a timing inconsistency. Its narrative says headline and underlying inflation stay above 3 percent until the end of 2027, but its forecast table lists December 2027 rates of 2.7 percent for CPI and 2.9 percent for trimmed mean inflation. Those figures should not be presented as a single unambiguous forecast; both point to a delayed return towards target, but the exact crossing date is unclear in the published material.

Energy, conflict and the AI boom

The higher path reflects materially higher global energy prices from the Middle East conflict, which have fed both directly into petrol and diesel prices and indirectly into other costs, alongside domestic capacity pressures now assessed as a little tighter than previously thought. Government bond yields in advanced economies have risen to their highest levels in many years on expectations of higher policy rates for longer; market pricing implies most advanced-economy central banks will raise rates at least twice by the end of 2027. At the same time, growth in Australia's major trading partners has been stronger than expected as the boost from artificial-intelligence-related investment has outweighed the adverse effects of the conflict, and rapid growth in data centre investment has supported domestic activity this year. The bank judges the risks to inflation remain skewed to the upside, though it notes inflation could also fall faster than forecast if tighter conditions and falling housing prices weigh more heavily on spending than expected.

Slower growth, softer housing, higher unemployment

Domestically, growth has slowed to a little below its estimated potential rate, and housing prices in September were almost 5 per cent below their March peak, reflecting higher interest rates and tax changes announced in the federal budget; new housing lending has fallen sharply. The unemployment rate rose by more than expected to average 4.6 per cent in the September quarter, largely reflecting a stronger-than-expected pick-up in workforce participation amid cost-of-living pressures. The bank forecasts growth of just 1.6 per cent in the year to December and 1.3 per cent in the year to December 2027, with the unemployment rate rising to a bit over 5 per cent by the end of 2028, around a quarter of a percentage point higher than previously expected, as spare capacity emerges in the labour market in 2027. Financial conditions are judged restrictive - the cash rate sits slightly above the top of central estimates of the neutral rate - though business credit growth remains strong, and ahead of the November meeting markets were pricing about one and a half further rate increases by mid-next year.

The bank judges the economy is still operating with excess demand, reaching balance next year before spare capacity emerges in 2027. Corporate risk premia remain low and the Australian dollar is assessed near its long-run equilibrium after appreciating this year. Overseas, trading-partner growth is expected to moderate as AI-related momentum slows and Chinese growth eases; market-based long-term inflation expectations remain consistent with central bank targets.