Inflation accelerated in Australia during August, with rising fuel costs and continued widening of price pressures, an indication that the wave of interest rate hikes this year has not sufficiently weakened inflation, which enhances the prospects of the central bank continuing to tighten its monetary policy.
Australian Bureau of Statistics data on Wednesday showed that the monthly consumer price index rose 0.4 percent during August compared to the previous month, driven by a 14.8 percent jump in fuel prices as a result of higher oil prices and the end of the effect of government tax breaks.
Although the monthly increase came below expectations of 0.5 percent, the annual inflation rate rose to 4 percent from 3.5 percent in July, exceeding the Reserve Bank of Australia's target range of 2 to 3 percent.
The core inflation measure, which excludes some volatile elements, stabilized at 3.6 percent on an annual basis for the third month in a row, after rising 0.2 percent during August. This measure has not shown a slowdown since the central bank began its monetary tightening cycle in February.
This comes after the Reserve Bank of Australia on Tuesday raised the interest rate to 4.6 percent, the highest level in 15 years, in its fourth increase since the beginning of the year, bringing the total monetary tightening during 2026 to a full percentage point.
The release of the data, which was slightly lower than market expectations, led to the Australian dollar falling 0.2 percent to 0.6974 US dollars, and the yield on three-year government bonds fell 5 basis points to 4.925 percent.
Market expectations for a rate hike in November declined, as the odds of the move fell to about 20 percent, compared to 35 percent before the data was released, while an additional hike by next March is still almost fully priced in.
Faraz Syed, chief economist at Citi, said that markets are underestimating the risks of raising interest rates again in November, noting that core inflation is still high enough to push the central bank to continue tightening.
He added that the bank cannot expect inflation to return to its target during the next six months, and that interest rates may need to rise further to reduce inflation expectations, estimating that the final interest rate will reach 4.85 percent.
The data showed that new housing prices rose 5.4 percent during August on an annual basis, with higher construction costs being passed on to buyers, while electricity prices jumped 13.2 percent.
On the other hand, downward inflation surprises came from clothing and travel, with demand for domestic travel declining after the end of the school holidays.
Australia is tightening its monetary policy at a faster pace than a number of major economies, after three interest cuts in 2025 led to increased domestic inflationary pressures.
The rise in energy prices linked to the US-Israeli war with Iran increases the risks of inflation continuing for a longer period, after Australian inflation has remained above the target level over the past five years.
Lucy Ellis, Westpac's chief economist, said a November rate hike had become the baseline scenario in the absence of a sustainable settlement to the conflict in the Middle East or another development that would lead to a significant reduction in Australia's energy cost forecasts.
Continuing to raise interest rates will increase pressure on the housing market and mortgage holders. House prices have already fallen 8 percent in Sydney and 7 percent in Melbourne since the beginning of the year, according to Kotality data.
The dollar is heading on Wednesday to achieve its largest monthly gain against the euro in 14 months, supported by the strength of the American economy and expectations of rising interest rates, in contrast to the energy and debt pressures that are burdening the European economy.
The euro fell on Tuesday to its lowest level since May 2025 at $1.1312, before trading near $1.1339 in Asian trading on Wednesday. The dollar is heading to achieve gains of approximately 2.5 percent against the European currency during September, on its way to recording a third consecutive quarterly rise.
The rise of the dollar also pushed the Australian dollar below the level of 70 cents for the first time since early August, after it fell to $0.6959, the lowest level in nine weeks, following the release of Australian inflation data that came slightly below expectations.
Brent Donnelly, head of foreign exchange trading at Spectra Markets, said that the US economy is “operating at a strong pace,” while Europe faces concerns related to energy, debt, and French politics, in addition to challenges in the artificial intelligence race.
Record European gas prices jumped earlier this month to their highest levels since 2022, while French markets are under pressure due to the debt crisis and political stagnation as next year's presidential elections approach.
The difference between French and German bond yields widened to more than 115 basis points, the widest level since 2012, reflecting the widening pressure on French assets.
On Wednesday, the markets are awaiting the release of the core inflation measure for personal consumption expenditures in the United States, the Federal Reserve’s preferred measure, but attention is more focused on the US jobs report scheduled for release on Friday.
Strong jobs data would boost expectations of higher US interest rates, thus supporting the dollar.
However, these expectations were subject to some decline after statements by John Williams, President of the Federal Reserve in New York, who said that there was “no need to rush” in raising interest rates. The yield on two-year US Treasury bonds fell by about 3.5 basis points, while market expectations for a rate hike next month fell to about 50 percent from 71 percent.
Against the dollar, the yen fell by about 2 percent during September, but rose by about 3.8 percent during the third quarter, recording in Asian trading the lowest level in about two weeks at 156.38 yen to the dollar.
The dollar also recorded its highest level in 16 and a half months against the Swiss franc at 0.8358 francs, while the New Zealand dollar stabilized near $0.5645 after falling on Tuesday to its lowest level since last November.
The Chinese currency is heading for a seventh consecutive quarterly gain against the dollar, in the last trading session before the Chinese holiday, which extends from the first to the seventh of October (October).
Gold prices fell on Wednesday, heading to record a monthly loss exceeding 6 percent, with investors increasingly anticipating US inflation data that may enhance interest rate expectations and determine the course of the Federal Reserve’s monetary policy in the coming months.
Spot gold fell 0.2 percent to $4,170.63 per ounce by 01:50 GMT, heading for the largest monthly decline in a while, while US gold futures rose 0.5 percent to $4,201.90.
The dollar, in turn, is heading for monthly gains, which increases the cost of gold denominated in the US currency for holders of other currencies.
Markets are awaiting the release of the Personal Consumption Expenditures Price Index, the Federal Reserve's preferred measure of inflation, later Wednesday, searching for indications on the path of interest rates.
Tony Sage, CEO of Critical Metals, said that personal consumption expenditures data will be an “important test for gold,” given its potential impact on monetary policy expectations and Treasury bond yields and the dollar.
He added that a weaker inflation reading may support gold and open the way for it to return to the range between $4,200 and $4,300, while a stronger reading may push bond yields and the dollar higher, and put pressure back on the metal with a test of the $4,100 level.
High interest rates usually reduce the attractiveness of gold, which does not yield a return.
The CME Group's Fed Watch tool showed that traders see a 47 percent probability that the Federal Reserve will raise interest rates in October, and a 91 percent probability of raising them in December.
The US central bank raised interest rates by 25 basis points this month.
In the same context, John Williams, head of the Federal Reserve in New York, said that monetary policy makers may need only one additional interest rate hike this year to return inflation to a path consistent with the bank's 2 percent target.
In terms of geopolitical developments, Qatar said it hopes that mediation efforts between Tehran and Washington will lead to a breakthrough, despite US President Donald Trump denying reports of Washington’s willingness to ease sanctions on Iran and release frozen Iranian funds in exchange for concessions on its nuclear program.
Spot silver fell 0.8 percent to $60.98 per ounce, while platinum settled at $1,705.10, and palladium fell 0.3 percent to $1,219.60. The three metals are also heading for monthly losses.
