Treasurer Jim Chalmers said on Sunday that Australia’s headline inflation is now forecast to reach a peak of roughly 4.25% around the middle of the year, a downward revision from the 5% peak projected in the federal budget released in May.
Chalmers pointed to lower oil prices and progress in peace talks in the Middle East as important contributors to the improved inflation outlook. He emphasised the need to maintain the ceasefire, noting the strategic importance of the Strait of Hormuz in global energy shipments.
The May budget had assumed headline inflation would hold at 5% through the June quarter and then decelerate to 2.5% by mid-2027. According to Chalmers, Treasury now expects the earlier peak to be lower than that budget projection.
At the same time, the treasurer cautioned that inflation remains above the level the government prefers, in part because of lingering uncertainties tied to developments in the Middle East. Nevertheless, he said the reduction in price pressures appears to be occurring faster than previously anticipated.
When asked about the outlook for underlying inflation - the measure closely monitored by the Reserve Bank of Australia when setting interest rates - Chalmers declined to comment. Treasury is expected to publish updated forecasts later this year.
Recent data from the Australian Bureau of Statistics showed annual headline inflation rose 4% in May, underperforming economists' expectations of 4.3%. The trimmed mean measure of underlying inflation, which strips out volatile price movements, increased 3.6% year-on-year, a touch above the consensus forecast of 3.5%.
The Reserve Bank of Australia has raised its benchmark cash rate three times this year, bringing it to 4.35%, and left policy unchanged at its June meeting. The central bank has said future decisions will be guided by incoming data as it works to return inflation to its target range. Inflation prints remain among the key indicators shaping the outlook for Australian interest rates.
For market participants tracking equities, the Australian dollar, and broader global markets, the shift in Treasury's peak-inflation expectation alters the near-term backdrop for monetary policy and asset allocation. Updated Treasury forecasts later in the year should provide greater clarity on the path for underlying inflation and help inform expectations for Reserve Bank decisions.