Inflation slides again. Will the spending slide too?
Australia's inflation is falling — but the government is spending in ways that could reverse every gain the RBA has fought to make.
Australia's inflation rate fell to 3.5 per cent in the twelve months to July 2026, the fourth consecutive monthly decline. That is genuine progress. When the current government took office, headline inflation was north of 6 per cent and climbing. The trajectory is now the other way. But here is the thing about trajectories: they can be reversed, and the government is doing things now that point in that direction.
The headline is falling. The underlying number is not.
Inflation is, at its core, a monetary phenomenon. Too much money chasing too few goods. The Reserve Bank's job is to tighten the conditions under which money moves through the economy, raising the cost of borrowing until demand cools enough to bring prices back in line with supply. That is unglamorous, painful, and slow. It is also, over time, the only thing that reliably works.
The government's job, if it genuinely wants to help the RBA, is to not work against it. That means not pumping additional demand into an economy that is still running too hot. Trimmed mean inflation, the measure that strips out volatile items and gives the clearest read on underlying price pressure, was steady at 3.6 per cent in July. The headline number moved; the underlying number did not. That is the number to watch, and it is still well above the RBA's 2 to 3 per cent target band.
Cutting the NDIS while paying for student debt and providing cost-of-living hand outs is not a coherent fiscal strategy. It is two fiscal strategies running simultaneously: restraint where the constituency is politically manageable, stimulus where it is not.
The $16 billion goes to people least likely to need it
Against that backdrop, the government's decision to write off $16 billion in student debt is worth examining carefully. The policy is presented as cost-of-living relief for graduates under pressure. What it actually does is inject $16 billion worth of effective purchasing power into the hands of people who, by most measures, are among the more financially capable members of the population — university graduates with incomes sufficient to be in the repayment system. That is not nothing. But as we have covered before, the design of student debt relief tends to benefit those carrying moderate debts with sufficient income to repay, rather than the borrowers genuinely struggling under the heaviest loads. And it does not reduce anyone's grocery bill this week. What it does is add fiscal stimulus to an economy the central bank is trying to cool.
Electricity rebates hide costs rather than cut them
The electricity rebates are a more defensible story. When energy prices fall because governments are subsidising bills, the measured inflation number drops but the underlying cost pressure in the system does not disappear — it gets deferred or redistributed. As we have reported on electricity pricing, the structural problem with Australian energy costs is not solved by rebate programs; it is obscured by them. A 1.6 per cent monthly fall in electricity prices driven by subsidies is a number in a press release, not a lasting reduction in the cost of keeping the lights on. That bill still needs to be paid.
NDIS cuts are the right principle, applied inconsistently
On the other side of the ledger, the NDIS cuts deserve a more honest acknowledgement than they typically receive. Restraining the growth of one of the federal budget's largest and fastest-growing expenditure programs is, from an inflation-management perspective, the right direction. The politics are genuinely difficult, and the question of whether the cuts fall in the right places is a separate argument. But the principle — that government spending at scale sustains demand and therefore sustains price pressure — is sound. If the government is serious about the inflation fight, it needs to apply that principle consistently, not only where it is electorally convenient.
The problem is that consistency and elections do not coexist easily. When the federal election comes, the pressure to spend will intensify and the discipline to hold the line is rare. Cutting the NDIS while paying for student debt and paying people’s electricity bills is not a coherent fiscal strategy. It is two fiscal strategies running simultaneously: restraint where the constituency is politically manageable, stimulus where it is not.
The Treasurer is right that Australia has made genuine progress on inflation. The four-month run of declining headline figures reflects real work, mostly by the RBA, and a broader global easing in supply-chain pressure. The basic mechanics of how interest rates and inflation interact have not changed, and neither has the risk of cutting the RBA's legs out from under it with a fiscal expansion running in the opposite direction.
Trimmed mean at 3.6 per cent. Sixteen billion in debt relief. The graph is pointing down. The spending is pointing up. One of those trends will eventually win.
Sources
Treasury — Inflation down again in July
ScienceDirect — High electricity price despite expansion in renewables
The Bearing — How Changing HECS Payment Timing Reveals the Real Cost of Student Debt
The Bearing — Government $2.5b power bill
The Bearing — 145,000 autistic people may lose NDIS support under Labor cuts
Frequently Asked Questions
Why is Australia's trimmed mean inflation higher than the headline rate?
Trimmed mean inflation strips out the most volatile items — including those affected by government subsidies like electricity rebates — to give a cleaner read on underlying price pressure. In July 2026 it sat at 3.6 per cent, above both the headline rate of 3.5 per cent and the RBA's 2 to 3 per cent target band, meaning the core inflation problem has not moved even as the headline has improved.
Does wiping student debt cause inflation?
Cancelling $16 billion in student debt effectively frees up purchasing power for university graduates who were in the repayment system, adding demand to an economy the Reserve Bank is actively trying to cool. It does not reduce prices directly, but it works against the monetary tightening the RBA is using to bring inflation down.
Are government electricity rebates actually reducing inflation?
They reduce the measured inflation number, but not the underlying cost of electricity. When a subsidy pays part of the bill, the CPI falls — but the structural cost pressure in the energy system remains, and when the rebate ends, prices snap back. The inflation relief is real in the data but temporary in practice.
Why is the RBA trying to cool the economy if inflation is already falling?
Because the headline figure falling is not the same as inflation being solved. The RBA targets trimmed mean inflation within a 2 to 3 per cent band, and at 3.6 per cent that measure remains above target. The RBA holds rates until underlying pressure is sustainably within the band, not merely until the headline number improves.
How does election-year spending affect inflation?
Governments facing elections tend to increase spending on visible programs — debt relief, cost-of-living payments, energy subsidies — that put money into the economy and lift demand. This works directly against central bank efforts to reduce demand and cool prices, creating a tension between fiscal and monetary policy that typically resolves in favour of higher rates for longer.