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Insights

Insights

After the September hike: when inflation and unemployment rise together

The Reserve Bank raised the cash rate by 25 basis points to 4.60 per cent on 29 September — the fourth increase of 2026, taking the cash rate to its highest level since late 2011. The decision was unanimous. It ended a two-meeting pause that had held the rate at 4.35 per cent since July, and it resolved the question this publication raised after the August meeting: whether the Board's shift from "if needed" to "if upside risks materialise" was a genuine change of bias, or a form of words. The risks materialised. The Board acted.

The language moved again

The September Statement dropped the characterisation of financial conditions as "somewhat restrictive" that had featured in recent commentary, judging instead that a further tightening in financial conditions was warranted to support inflation's return to target. That is a more direct position than August's conditional framing. It reads less like a Board keeping its options open and more like a Board that has concluded the inflation task remains unfinished.

The data released around the decision explains why. The day after the hike, the Australian Bureau of Statistics published August's monthly inflation figures: headline CPI rose to 4.0 per cent over the year, up from 3.5 per cent in July. The trimmed mean — the RBA's preferred measure of underlying inflation — held at 3.6 per cent for a third consecutive month, its highest reading since September 2024. Both measures remain well above the Board's 2–3 per cent target.

Two things rising at once

What makes September's data harder to read than August's is that inflation was not the only indicator moving against the Reserve Bank. Five days before the rate decision, the ABS released the August Labour Force figures: the unemployment rate rose to 4.6 per cent, up from 4.5 per cent in July and the highest level since the post-pandemic period of late 2021. Employment actually grew by 39,500 people over the month — more than double what economists had expected — with almost all of that growth in part-time roles, while full-time employment fell. The rise in unemployment occurred because more people entered the workforce than the labour market could immediately absorb, lifting the participation rate to 67.1 per cent.

A rising unemployment rate alongside strong employment growth is not, on its own, an alarming combination — a growing labour force is in many respects a healthy sign. Governor Bullock has been explicit in recent public comments that higher unemployment is, in her assessment, part of what will be required to bring underlying inflation back to target. That is a notably different posture from the "extended hold, inflation easing gradually" framing this publication described after the August meeting. The Board is now describing a trade-off, not a glide path.

Australia's cash rate decision did not occur in isolation. Two weeks earlier, on 16 September, the US Federal Reserve delivered its own first hike since 2023, lifting the federal funds rate by 25 basis points in a unanimous vote, with Chair Kevin Warsh citing persistent inflation pressure despite economic resilience. Two of the world's most closely watched central banks have now raised rates within a fortnight of each other, after a year in which most forecasters expected both to be cutting. The direction of institutional thinking, once again, has moved the same way in two different economies with two different inflation stories.

What this means in practice

For borrowers, the practical effect is cumulative. According to the ACTU, the four rate rises delivered in 2026 together require the average mortgage holder to find an additional $460 a month to service their loan compared with the start of the year. For savers, the same cycle has delivered the highest returns on cash and term deposits in well over a decade — a credible, low-risk competitor for capital that did not meaningfully exist for much of the past fifteen years.

Market expectations for the November meeting have eased somewhat since the September data, with several economists noting that the softer-than-feared detail in some inflation components reduces the odds of a further near-term move. That is a useful data point. It is not a basis for a portfolio decision. The Board itself does not know what November's data will show, and a forecast of a forecast adds no information.

The principle

Two months ago, the question this publication posed was whether the RBA's shift in language signalled a change in bias. It did. The harder question now is what a central bank does when the two variables it is meant to balance — inflation and employment — are moving in the same uncomfortable direction at the same time. There is no mechanical answer to that question, and no portfolio should be built as though there were one.

What a portfolio can be built to do is participate in productive enterprise through a structural equity orientation, maintain genuine diversification across asset classes exposed to different drivers, and hold real assets calibrated to protect against the inflation risk that, over a long enough horizon, outlasts any single rate cycle. None of this requires a correct call on the November meeting, or on whether Australia's current data pattern proves temporary or persistent. The environment has become more demanding since August. The response is not to predict its resolution; it is to hold a structure built for a range of outcomes rather than one.

If you would like to review how your portfolio and your household cash flow are positioned for a period of higher rates that may run longer than earlier expected, we welcome the conversation.

Ben Widdup
Wealth Manager

1300 102 542 | 0402 633 205
ben.widdup@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Ben Widdup