Economic Update August 2026
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
Australian interest rates may be moving lower.
Inflation pressures are easing across much of the Australian economy.
Australia’s labour market remains relatively resilient.
US Federal Reserve commentary contributes to market volatility.
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact the team.
NAB has joined 20 other lending providers in cutting certain fixed-term home loan rates despite the published odds of an interest rate hike by the RBA at the time being material.
The Australian central bank is no longer alone in being on ‘a hiking cycle’. New Zealand, Korea and the EU now have raised their interest rates. Of course, Japan has too – up 25 bps to 1.00% on June 16th – but this is the first time the BoJ rate was 1.0% or more since April 1995. Japan has been on a tortuous recovery for 31 years! The 1% rate is still well below a neutral rate.
The RBA will next consider its interest rate setting on August 11th. The odds of an increase given in the RBA rate tracker app on the ASX website fell from 42% on July 24th to 0% on July 30th. In our opinion, much of the inflation problem has been resolved and the market now recognises that.
The latest CPI reading for Australia (on July 29th) was 3.8% which was down from 4.0% the month before. If we exclude ‘Housing’, which includes electricity and rent inflation, we estimate that CPI inflation for ‘most things’ is now in the target range of 2% to 3% at a level of 2.9%.
We have long-held our view that the ABS correction to electricity price inflation – by imputing an estimate of government rebates – has distorted the view of CPI inflation upwards by about half a percent. The latest ABS-adjusted electricity price inflation was 22.4%, a far cry of the unadjusted rate of 3.9% in the month before [for reasons not stated, the ABS did not update this statistic for the June data].
Given the changing status of the shipping lane through the Strait of Hormuz, and its consequent impact on global oil prices, it is hard to predict inflation as the aggregate has a large oil-affected component.
Besides the direct consumption of petrol and diesel etc, by consumers, there are second-round effects of fuel prices through aviation and land transport that feed into many other consumption categories. However, the base month for inflation calculations will reach highs around the early months of the US-Iran war – March, April when the price of Brent crude oil, a global benchmark, reached $US 118 per barrel. In the escalation of Iran’s closure on the Strait of Hormuz towards the end of July, Brent only just broke through $100 and has retreated to near $80. Unless there is an escalation that takes oil prices back well above $100, inflation statistics should get some relief in the first half of next year.
The latest jobs data for Australia looked promising at first sight but they did not hold up well to further scrutiny. The unemployment rate held at 4.4% and 76,300 jobs were created. However, when the unemployment rate is expressed to two decimal figures there was a clear increase of nearly 0.1%. Rounding error masked the upward trend that has continued since 2022 when the unemployment rate was only 3.4%.
Full-time jobs increased by 29,300 which is only a 1.4% increase over the corresponding month in 2025. That annual gain was insufficient to keep pace with long-run population growth.
Given the softness in the employment data and the rapidly improving inflation situation, it is time to act on cutting the RBA interest rate if, indeed, it is not already too late!
There are three interest rate hikes ‘in the can’ from earlier this year that are yet to slow the economy. The RBA agrees with that view. They will have minimal impact on inflation as the electricity rebate is a technical calculation unaffected by interest rates, and our oil prices are almost entirely determined by global oil prices and not our interest rates. The exception is that the government cut the fuel excise tax which is removed from the start of August. Of course, interest rate hikes will hurt consumers even more causing suppliers to have less motivation to raise prices.
The newly appointed chairman of the US Federal Reserve, Kevin Warsh, created a volatile equity market with his post-Federal Open Markets Committee (FOMC) media conference. The S&P 500 share market index recovered from around a 1% loss during that day before the decision was announced at 2pm, local time (ET). The index sprang up briefly into the green at the start of the media conference. During his question-and-answer session, the market lost all of the ground it had just recovered and then some. The next day, the market largely recovered its losses and continued its climb on the last day of July.
So, what was the problem? Warsh clearly stated that he wants the market to form its own view of what policies are needed rather than be guided by ‘the teacher’. He also stressed that the Fed target is exactly 2% and not two-point-something that he had alluded to in his previous and first media conference. Given that the published odds clearly support an interest rate increase at some point in this year, two journalists asked what he is waiting for. He didn’t answer but only a fool would have done so. He seems to be a powerful, intelligent chairman that we think will lead the Fed into a new era of monetary policy.
A significant outcome that will have a profound effect on the economy is the yield curve – a series of dots that connect the yields on US Treasuries of different terms from one month out to 30 years. During the Q&A, it rose sharply with the 30-year yield breaching 5.20% for the first time since April 2007 and was 5.26% at the end of July. The 10-year yield ended July at 4.71%. Last year, there was a market crisis when these two yields reached 4.5% and 5.0%, respectively, under the early Trump tariff proposals. Those yields seemed to trigger Trump to pull back on his original proposals.
Trump is now cornered because he has praised his appointee, Warsh, yet the rates that people and businesses pay are higher even without Warsh changing the Fed’s interest rate.
Long-dated bond yields are thought to be heavily influenced by inflation expectations and not the Fed overnight interest rate that only operates between banks. The market appears to be factoring in higher inflation for longer under Warsh even though he repeatedly said he would control inflation and the whole Federal Reserve committee is behind him.
The Fed focuses on Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) inflation – the latter being based on Personal Consumer Expenditure data. The weights of the various components of PCE inflation vary over time while the CPI inflation has fixed weights between resets (usually one year apart).
US CPI inflation was 3.5% (2.6% for the core variant that strips out volatile items like food and fuel) which was well down from the previous reading of 4.2%. Shelter inflation is usually a problem in the US and the previous chair, Jerome Powell, acknowledged that in media conferences. CPI-less-shelter inflation, an official statistic, was 3.7%
US PCE inflation was 3.7% (3.3% for core) which was down from 4.1%. Clearly the latest readings are well over the target, but they are falling quickly without any increases in interest rates! Powell flagged that he was ‘looking through’ the temporary oil price spike. Our governor, Michele Bullock, said she wanted to get ahead of oil-price inflation. We almost have a control group (as in clinical drug trials) to test these policies.
We don’t think the Fed will raise interest rates this year unless a new problem arises. The US economy isn’t looking too bad but a lot of that has been fired up by the AI investment boom. There is no doubt that AI will have some massive benefits for the economy, but some people will have to re-adjust their work-lives to cope. But future success does not mean the current and projected levels of investment in data centres and the like are appropriate. We made need more, or less. The Fed and the government need to monitor the situation and act accordingly.
From our perspective, we see no heightened risks in markets compared to the last few months. The S&P 500 and the ASX 200 are near all-time highs. Earnings expectations in the US and Australia are strong. Bond markets are trying to adjust to a new Fed scenario.
Asset Classes
Australian Shares
Australian equities (ASX 200) rose by +2.3% for July. The Energy sector gained 12.2%, Financials 5.8%, Health 2.3%, and Discretionary 0.9%. The other seven sectors experienced zero or negative gains.
International Shares
The S&P 500 was flat at ‑0.1% in July. The London FTSE gained the most of the major indices we follow, with gains of 3.5%. The German DAX gained 2.5%. Japan’s Nikkei lost ‑8.1%, the Shanghai Composite lost ‑6.4%, and Emerging Markets lost ‑4.5%
Bonds and Interest Rates
The Reserve Bank of New Zealand (RBNZ) and Bank of Korea both raised interest rates by 25 bps to 2.5% and 2.75%, respectively.
The Fed kept its interest rate ‘on hold’ but the market view is mixed with many expecting a single interest rate increase while others expect no increase.
Three of the voting members of the FOMC wanted a 25bps increase to interest rates. Nine members wanted to keep interest rates at 3.5% to 3.75%.
Despite being on hold, there were major upward shifts in Treasury yields across durations. The 30-year yield ended July at 5.26%, the highest yield since before the GFC
The RBA next meets on August 11th. The RBA Rate Tracker app on the ASX, at the end of July, was pointing to a strong chance of an interest rate hike at that meeting. Despite this, 21 lending institutions in Australia have recently cut at least one of their fixed term home mortgage rates.
Other Assets
Brent Crude (23.6%) and West Texas Intermediate (WTI) (21.8%) oil prices were up strongly on new attacks by both sides over the closure of the Strait of Hormuz.
The price of copper was up 3.6% while iron ore prices were down ‑3.6%. Gold was almost flat at 0.3% for the month of July.
The VIX US share market volatility index ended July just above the normal range at 16.0 with an intra-month peak of 20.7
The Australian dollar appreciated by 2.3% against the greenback over July.
Regional Review
Australia
The unemployment rate was seemingly unchanged at 4.4% but a rounding error masked the ongoing trend higher from a base of 3.4% in 2022.
Allegations abound about misuse of NDIS funding. The latest was that some people are getting golf instruction on the programme. This activity is not an isolated problem. The government is trying to clamp down on poor practices. Perhaps NDIS expenditures keep the unemployment rate down through some good employment and some questionable activities.
More generally, there have been many changes in the way that people get employed compared to pre-Covid times: delivery services, ride sharing, and working from home. We think it is telling that the unemployment rate has risen by 1.0% since 2022 and the effect of recent interest rate hikes is yet to be felt. However, government spending on public servants and various programmes is expansionary.
Gross government debt from the May 2026 budget was listed at $1.05 trillion dollars. Debt repayments are a major source of government expenditure. The government is trying to make major changes to tax revenue collection through abolishing negative gearing on many properties and implementing a minimum 30% tax rate on capital gains above an inflation-indexed base. Simply stating that more tax revenue is needed is not a compelling argument to back these policy changes.
China
The China manufacturing Purchasing Managers Index (PMI) fell below the 50 mark indicating a contraction. The latest number was 49.2 from 50.3. The market forecast was 50.0. The major problem was a slackening of exports, including to the US.
Inflation was 1.0% from 1.2%. Core inflation was also 1.0% but from 1.1%.
June quarter GDP growth missed policy targets at 4.3% but the figure for the whole of 2025 was 5.0%; right on target!
Retail sales were up 1.0% from ‑0.6% the month before. Growth of ‑0.1% was expected. Industrial output was much stronger than the month before coming in at 5.3% from 4.5%.
United States
Jobs growth was not as strong in the latest month. After three months of in excess of 100,00 new jobs, a more modest 57,000 jobs were recorded for June. However, 31,000 and 43,000 jobs were taken away from the previous two months’ data in revisions.
The first month’s data is largely based on telephone surveys. Two subsequent months’ are assisted by collecting formal and detailed inputs from companies.
The average ‘nonfarm payrolls’ jobs averaged 37,000 per month over the last 12 months. The unemployment rate was 4.2% down from three consecutive readings of 4.3% and a 4.4%, four months prior.
The global tariffs of 10% and 12.5% expired in late July. US President Trump is endeavouring to replace these with other tariffs again using little known, old legislation. Court challenges have already started. Trump’s claim is that these countries – nearly all in the world – are using a labour force that has not been afforded reasonable working conditions.
A major issue facing the USA is that its oil inventories have been seriously depleted because of the war with Iran. If the Straits are not opened soon, there could be big increases in gas (petrol) prices on the way in the US and elsewhere.
Europe
EU inflation fell from 3.2% to 2.8% in the latest month. The market expected 3.0%. Of course, there is no way the recent interest rate hike could have been responsible for the fall. As in Australia and the US, inflation has been falling as oil prices fall. Core inflation fell from 2.6% to 2.4%.
Unemployment rates around Europe are varied. The average for the EU was 6.2%. Germany recorded a rate of 3.8% but the rates in Spain and France were 10.3% and 8.2%, respectively.
Rest of the World
Japan had exceptionally strong trade data in June: exports were up 19.3% for the 12-month period and imports were up 25.4%. CPI inflation was acceptable at 1.6%.
Korean inflation was 3.2% form 3.1% and the Bank of Korea raised rates by 25 bps to 2.75%.
The RBNZ also increased its rate by 25 bps but to 2.5%.
The FIFA World Cup ended in North America with Spain being victorious. Many experts claimed the final against Argentina was boring and niggly. Argentina did not make one shot on goal in the first 90 minutes (normal time). Spain won in a ‘penalty shoot-out’
The match finished with a brawl on the sidelines after the final whistle. It resulted in a red card for one of the Argentine players. It was almost certainly the last match for Messi, undoubtedly one of the best, if not the best, player in football history. He carried himself like a gentleman throughout the whole tournament while his team mates brought disgrace on their country.
After a ceasefire and almost a re-opening of the Strait of Hormuz, clashes between Iran and the US resumed and less traffic was allowed through the strait. Iran is claiming that the straits belong to them and, therefore, they can charge a toll for safe passage.
The Houthis, backed by Iran and located in Yemen, caused disruption in the narrow passage, called the Bab-e-Mandeb Strait, into the Red Sea.
It appears that the radicals in Iran want to continue the war with the US but the moderates, who drafted the MOU, want peace. It is less than completely clear who is in charge in Iran.
Have more questions? Reach out to our knowledgeable team today.
We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.
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