Economic Update July 2026
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
Oil prices returning to normal despite a shaky end to the Iran conflict.
Australian inflation remains elevated, partly due to higher oil prices, but appears to be coming under control.
Australian growth remains sluggish, weighed down by three RBA rate rises this year.
The US Federal Reserve is taking a longer-term approach, with no immediate interest rate rise now expected.
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.
The Big Picture
Understanding the dynamics of Australian Consumer Price Index (CPI) inflation has been hampered by three important factors: (1) the removal of the energy rebate; (2) the impact of the Middle East situation on global oil prices; and (3) the temporary reduction in the fuel excise tax.
It is too early, even by the RBA’s admission, for the three interest rate hikes earlier this year to have yet had any impact on inflation. Governor Bullock said it would take six months or more for the interest rate hikes to bite. General opinion in professional economic circles is that it takes 12 to 18 months for the full effect of interest rate hikes to work their way through the economy.
We are of the opinion that the Australian Bureau of statistics (ABS) modification to electricity price inflation is misleading. The energy subsidy was a flat per household rebate and not a price adjustment. The ABS calculation made CPI inflation look much better as the rebates were first being paid out. On the flip side, inflation looks a lot worse as the rebates come off.
For example, the ABS reported electricity price inflation over a trailing 12-months period has been over 20% for each month this year. However, the ABS reports that, without the rebate adjustment, electricity price inflation was only around 4% per annum. It will be January 2027 before this adjustment will exit the calculations for CPI inflation.
The fuel excise tax was cut to help consumers through the global oil price spike. That was a genuine cut to prices at the pump and so is a valid correction to inflation. The cut played a big part in keeping CPI inflation in check. However, from July 1st 2026, that rebate will be reduced by 16 cents and then there will be no rebate applying from August 2nd.
As it happens, it was reported that petrol was at its cheapest in parts of Sydney in five years at the end of June. The reduction in the rebate from July 1st could add as much as 10% to inflation of automotive fuel prices in just one month! Care must be exercised in interpreting any spike in the CPI when the July data are released in August.
The conflict between the US and Iran, and Israel and Lebanon, caused global oil prices (Brent Crude oil) to rise from US$60 per barrel to US$118. Since that peak, Brent Crude oil prices have fallen by 38% to US$73.
The impact of global oil prices on domestic automotive fuel prices is complex to say the least. It depends on factors such as inventories, forward buying, transportation delays and the margins desired by domestic sellers.
It looks to us that, if the tenuous end to the Middle East war holds, CPI inflation could well continue to fall into the end of the year without any monetary policy intervention, past or present, by the RBA. We think the RBA was a bit overzealous in raising interest rates as much as they did this year. Australian interest rates do not affect global oil prices!
By our calculations, CPI inflation without the (we think spurious) electricity rebate effect would be about 0.5% points lower. Therefore, we see underlying inflation as only just half a percent above the top of the target range (2.0% p.a. to 3.0% p.a.) and falling naturally.
The RBA has a dual mandate of full employment and stable prices (or low inflation). The employment side of the mandate has not received adequate attention. Although the unemployment rate of 4.4% for the latest month and 4.5% for the prior month are low by historical standards, there has been a relentless upward linear trend from 3.4% over the last four years. We note trends in unemployment have usually reacted slowly to changes in policy.
The RBA 2026 interest rate hikes were designed to slow the economy (as a means to lower inflation) so we see the ‘long and variable lags’ that follow from applying monetary policy will continue to make the labour market weaker over the rest of 2026 and well into next year, unless the RBA reverses its policy. Even if the RBA were to reverse the interest rate hikes immediately, it would be too late to avoid a further economic slowdown. However, at this point, we do not think a recession is on the cards. But it does depend quite a bit on what the RBA does next.
The rapid rise of ride sharing (like Uber) and delivery services that began during the pandemic lockdowns have persisted and have changed the way the labour market works. The previous concept of what constituted a good rate of unemployment may no longer be relevant. The growth in Australian employment shows a clearer picture as to what is happening in the economy. The latest 12-month growth in employment was 1.0% which is well below average population growth. Full-time employment grew by only 0.5%.
In 2025, the natural increase in population (births less deaths) was 111,500. The net migration into Australia was 301,000. Immigration swamped the natural progression of population. Total population grew by 1.5% in 2025.
Immigration is, and has been, central to the development of Australia. However, rapid changes in immigration make it harder to interpret economic statistics and unplanned increases will tend to force house prices higher.
We can see the flow-on effect from sluggish employment growth in the National Accounts data that were just released. GDP growth for the March quarter, 2026 was only 0.3%, and 0.1% when growth is presented on a per capita basis. Productivity gains are almost non-existent.
The government, through the Federal Budget, appears to be trying to steer the economy through the current slow-down with tax increases (by changing negative gearing and capital gains rules). It has been forced to modify some of its policies but some feel that these changes could have an adverse effect on housing that doesn’t go toward solving the housing affordability crisis.
Mortgage interest rates have gone up sharply this year. However, three of the big four banks are predicting that the next rate move by the RBA will be down. Westpac has one or two more interest rate hikes pencilled in.
It turns out that the market, as judged by the RBA rate tracker tool on the ASX website, has a 20% chance of there being an interest rate hike at the end of July.
The US Federal Reserve (Fed) is now being steered by a new chairman, Kevin Warsh. In his first meeting and press conference in June, he announced a detailed programme to evaluate how monetary policy should be conducted and communicated. He appears to be a very able addition/return to the Board of Governors.
However, Warsh did speak as though a better approach could have avoided the last five years of inflation in the US. We think most of the inflation in that period arose from supply-side issues (pandemic, supply chain, war, oil prices, etc). No central bank could have avoided inflation from those sources. However, it is quite possible he could have done a better job.
He gave the impression that not much will change until the end of the year when his five working groups are expected to report back on the questions he posed to them.
Importantly, Trump has backed off on his criticism of the Fed. And the Supreme Court just reported Trump has no case to sack the governor, Lisa Cook. However, Trump replied that he will still try and find a way to remove her. Many recent court decisions have concluded that Trump’s motives for his actions are largely political.
Trump does seem to have had enough of the war with Iran. Some seaborne traffic is getting through the Strait of Hormuz, but live fire has been exchanged as recently as the last week of June. Iran has made it clear that it wants to continue to control the Strait and it is reluctant to reduce its nuclear programme. The US clearly lost this war. It had a better offer from Iran in February that it did not take. And many suggest the deal Obama made was better than what the US now has – but Trump ripped up that deal during his first term as president!
While all this turmoil has been taking place, the US stock market has done rather well. The S&P 500 did fall 1.1% in June but that was from a record high. It was up +9.6% in the year-to-date. The so-called magnificent-7 (seven mega cap IT stocks) dominated growth in 2025 and the first part of 2026. Different IT stocks led much of the recent sell-off.
It is normal for markets to go through phases, and current behaviour does cause us some concern as valuations remain stretched and the dependence of the whole IT sector on the delivery of anticipated massive infrastructure spending is a risk should this spending moderate. Notwithstanding, earnings forecasts, as reported by LSEG (formerly Thomson Reuters) data bases, are strong and able to support further market growth.
The ASX 200 has had much poorer growth in recent months than the S&P 500. Some of this underperformance may well be due to the squabble over negative gearing and CGT, but our poor productivity growth must also be a major factor.
US bond yields have stabilised below their recent highs. The bigger issue for Australian investors is what to do about property investment. A major impediment to investment is likely to be the lack of averaging capital gains over five years for taxation purposes as originally laid down by Keating. Investors will likely be hit with bigger tax bills from now on when selling property than in recent times.
Early data published by a private company had capital city house prices down by 0.6% over the latest month with Sydney ( 1.2%) and Melbourne ( 1.0%) leading the fall. Given the difficulty in computing robust house prices and there being only one month of data post the budget, it is too early for these data points to be meaningful. However, it is quite possible that some softer data will follow.
While we see some optimism for investors for the second half of 2026, we do not think markets are ‘back to normal’. Appropriate diversification and monitoring of economies and markets remain essential.
Asset Classes
Australian Shares
Australian equities (ASX 200) rose by +0.5% for June and 2.8% for the 2026 Financial Year (FY26). When dividends (but not franking credits) are included, the total FY26 return on the ASX 200 was a more reasonable +6.1%.
Although the Materials sector was down 6.7% for June, it was up a staggering +47.5% for FY26. In contrast Health was down 37.4% and IT 37.2% for FY26.
International Shares
The S&P 500 lost 1.1% in June but gained +20.9% over our FY26. Also, over FY26, the following had very strong returns: Japan’s Nikkei (+73.0%); the UK’s FTSE (+19.8%); China’s Shanghai Composite (+18.9%). Germany’s DAX only gained +4.5% and Emerging Markets were up strongly (+47.5%) on the back of the tech sector in particular semiconductors.
Bonds and Interest Rates
The European Central Bank (ECB) joined the RBA in this interest rate hiking cycle with a 25bps increase to 2.25%. The Bank of Japan (BoJ) also increased its rate by 25 bps but to 1.0% (its highest rate in 31 years). Rather than tightening monetary policy, the BoJ is interpreted the move as ‘as reducing its easing policy’.
The RBA was ‘on hold’ in June, as expected, at 4.35% but it does seem interested in exploring further interest rate hikes in 2026.
The Fed, under its new leadership, had unanimous support for holding it interest rate in a range 3.50% to 3.75%. On future guidance, Chairman Warsh declined to provide his ‘dot’ for the ‘dot plot’ or his forecasts of growth, unemployment and inflation.
Of the 18 members who supplied dots for the end of the year, one dot was for a cut, eight for being ‘on hold’, three for a single interest rate hike, five for two interest rate hikes and one for three interest rate hikes.
With only four more meetings scheduled for 2026, that is a lot of dispersion! While the median call is ‘on hold’, the skew favours hiking rates! Warsh will need to get in front of this if his plan is to hold interest rates steady until inflation eases.
Trump yet again renewed his comments on needing a Fed to lower interest rates. He does not seem to understand that the Fed has very limited influence over the interest rates borrowers (households and businesses) pay. Indeed, over the recent interest rate cutting cycle by the Fed, the 10-year
Government bond rate was either flat or rising over the same period. Markets mostly determine interest rates that people earn or pay.
But US Treasury bond yields have stabilised below what were previously thought to be ‘danger levels’. The CME Fedwatch tool has an interest rate hike in July priced in with a probability of 33.7%. There is an 82.7% chance of one or more interest rate hikes priced in by the end of 2026!
Former Fed chair, Alan Greenspan, passed away in June aged 100! He served as chair for a record 19 years and was credited with many successes although some claim his policies caused the Global Financial Crisis (GFC). Even this year he signed a letter with all of the other living Fed chairs to denounce Trump’s attacks on the independence of the Fed. We prefer to acknowledge his great achievements.
Other Assets
Brent Crude oil ( 20.8%) and West Texas Intermediate (WTI) Crude oil ( 20.4%) oil prices were again down sharply on the (partial) opening of the Strait of Hormuz. Oil prices are 38% down from their recent peaks.
The price of copper was down 1.9% in June. Iron ore was down 6.0% and gold was down sharply at 12.1%.
The VIX US share market volatility index ended June just above the normal range at 16.7.
The Australian dollar depreciated by 4.1% against the US dollar over June. It appreciated by +4.9% over FY26.
Regional Review
Australia
The unemployment rate slipped back to 4.4% in the latest (May) data. Jobs growth over the year to May was only +1.0% which is well below a rate necessary to accommodate population growth (+1.5% in 2025). Full-time jobs grew even more slowly at +0.5%.
GDP growth for the March quarter 2026 was only +0.3% but +2.5% for the year. On a per capita basis, growth was 0.1% for the quarter and +1.0% for the year. As the latest round of RBA interest rate hikes start to bite, we see growth slowing further.
The household savings ratio was 6.2%, down from 7.0% in the previous quarter. These figures are consistent with households being a bit more cautious about their futures. We consider a range of 5% to 6% to be ‘normal’ for this ratio.
The minimum wage was increased by 4.75% which will be a welcome increase for the lower paid workers struggling with the cost of living.
The Westpac consumer sentiment index slipped back to a very low reading of 80.6 from 83.0. The NAB business indicators were also weak.
China
The China manufacturing Purchasing Managers Index (PMI) index was 50.3, up from 50.0 at the start of June. CPI inflation was steady and on expectations at 1.1%. Input price inflation (PPI) was up sharply at 3.9% from 2.8%.
Retail sales growth, at 0.6%, for the latest 12-month period was the first negative reading since December 2022.
Industrial output rebounded to 3.9% from a 3-year low.
United States
Jobs growth again surprised to the upside with non-farm payrolls coming in at +175,000. The unemployment rate was steady at 4.3% and wage growth was 3.4%.
The last three months of increases in jobs data arrested the steady decline from the previous year. The jobs number is periodically revised and former Fed chair, Jerome Powell, stated that he thought there was about a 60,000 overestimate in the preliminary jobs numbers.
Unsurprisingly, CPI inflation rose on the back of oil price increases to 4.2% for the year. Core inflation, which strips out energy and food, was a modest 2.8%. The Fed target is 2% but, in his first press conference, Warsh alluded to ‘two-point-something’ was ‘good enough’. Perhaps he will be moving to a range target of 2% to 3%.
As we have previously pointed out, rent takes a very big weight in the CPI calculation (about one third). Since rent inflation has averaged well above 2% for decades, a range of 2% to 3% is, perhaps, a more reasonable target as for an aggregate CPI.
The third and final estimate of March quarter 2026 GDP growth was up to +2.1% from the second estimate of +1.6%. Private Consumption Expenditure (PCE) inflation was 4.1% from 3.8% and core PCE, the Fed’s preferred measure, was 3.4% from 3.3%. Warsh seems unlikely to want to act on these numbers as he is aware that the Fed cannot control global oil prices.
Europe
The ECB increased its interest rate by 25 bps to 2.25%. Inflation was reported to be 3.2% which is the highest reading since September 2023. Core inflation was 2.2%. It is not obvious why the ECB felt an urgency to raise its interest rate.
UK growth was 0.1% and inflation was 2.8%. The Bank of England kept its policy interest rates on hold. The UK PM, Sir Keir Starmer, has resigned. A former mayor of Manchester (with a strong North of England accent!), Andrew Burnham, is expected to replace Starmer during July.
Burnham has already stated that he wants to create a ‘No 10 of the North’ in Manchester in an attempt to unify the country. Burnham would be the seventh PM in 10 years (and they have a maximum term of five years for each elected parliament).
Rest of the World
The unrest continues in the Middle East but there seems to be a split arising between Trump and the Israeli PM, Netanyahu. The latter is contesting an election before October 27th and is reportedly not doing as well as he normally does in the polls.
Israel still occupies large sections of southern Lebanon and north of the Israeli border, and is showing no signs of moving, citing ongoing conflict with Iran backed Hezbollah forces which is further frustrating the achievement of an end to the Iran war. Trump has reportedly uttered sharp words of criticism against Netanyahu for Israel’s actions.
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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