Economic Update with Dr Susan Stone: October 2026

Inflation is proving difficult to tame

Please note these are the views of Dr Susan Stone, not Credit Union SA.

Inflation has remained outside the RBA’s target range since COVID. While it looked to be heading in the right direction for a brief period in 2025, that was short lived and the RBA had to switch tactics and started to raise interest rates again in 2026. So far, we have seen 4 rate rises this year, which is a lot by any measure.

Why has inflation been so persistent? It started by pent up demand being unleashed after COVID lockdowns were relaxed. Since then, supplies of goods and services have not been able to keep up with this demand, which has led to price increases. The RBA’s repeated reference to ‘excess demand’ is referring to just this trend. Labour shortages in key sectors, like construction, have only added to the stress on the system.

The most recent CPI shows annual inflation increasing to 4 percent, running well above the target rate of 2.5 percent. Inflation in goods, after falling to 3.2 percent in July, is back up to 4.2 percent. Services inflation, which was a major concern of the RBA, has moderated to 3.7 percent, but that is still too high.

Housing shortages remain, and while markets have softened recently, annual increases in prices for both buyers and renters continue. This has been felt especially in South Australia. The housing component of CPI (which includes rents, purchase prices, utilities and renovations) in South Australia was more than 70 percent higher than for Australia overall (7.9 percent versus 5.7 percent).

While international pressure in energy and food prices is playing a part, domestic demand remains the primary source. Inflation in tradable goods, the contribution of goods and services that are highly exposed to international influences, such as automotive fuel and most food items, is running at 2.9 percent. Inflation in non-tradables, measuring the contribution from goods based on domestic pressure, is 4.5 percent.

Other key data

Annual economic growth for Australia was 2.1 percent as of the June quarter. Most experts expect that rate to slow to 1.8 percent into 2027. South Australia growth is expected to slow as well, from 2.25 percent to 1.75 percent. While this growth remains positive, it is not the strong economic growth the economy needs to fuel increases in our standard of living and move us beyond the current cost of living crisis.

On the positive, labour markets remain strong. While unemployment has risen to 4.6 percent, the market remains tight. This stems from the fact that the participation rate increased at the same time, so while there are more people looking for work, there are more people in the labour market in general.

After experiencing one of the lowest unemployment rates in the country, South Australia saw the biggest jump of any state increasing from 4.3 percent from 4.6 percent. However, like other states, SA experienced an increase in its participation rate. This indicates that labour markets remain tight in the state.

While household debt ticked up in 2026, it remains well below peaks seen in the mid-2010’s. Household savings ratios rose to 6.5 percent in 2026 from 5.9 percent in the same period last year. The share of housing loans in arrears (i.e. more than three months behind on their repayments) has increased a little over the year to date but remains around pre-COVID levels. Despite this, both consumer and business confidence are weak. Recent industry reports¹ show consumer sentiment slipping to a 30 year low after the most recent RBA rate increase. Business confidence, as reported by a recent survey², is at its lowest levels since COVID while business conditions slid to a six-year low, while cost pressures remain a primary concern.

Adding to these concerns is the growth in government spending. Global conditions and inflation have added to pressure on government budgets, leading to an increase in spending of 4.3 percent versus the 3 percent forecasted. Increasing bond yields mean the interest government must pay on debt will increase, leading to further budget pressure. Higher borrowing cost effects South Australia as well. While SA has not been among the biggest borrowers (both Vicotria and New South Wales have higher levels), we still face significant interest payments, especially when the debt incurred during COVID needs to be refinanced at much today’s higher rates.

While Australian debt levels remain small compared with other OECD economies, it is still high by historical standards and thus may impact on the government’s ability to meet future spending needs.

The key piece of the puzzle – Productivity

As inflation concerns persist, business spending remains weak. Investment in data centres, the one standout, has been growing substantially. And while these data centres are expected to underwrite an AI surge that will support productivity gains, those gains are as yet, unrealised.

In the meantime, we need to support productivity growth across all economic activity. Australia has one of the weakest records on productivity across the OECD. Productivity is what drives improvements in our standard of living and so is essential for prosperity. Currently, demand in the economy exceeds our ability to supply goods and services, hence prices go up and we have inflation. To address this, we must increase aggregate supply. The most obvious example is the housing market, but it extends to most other things we buy.

If we increase supply by simply adding more labour and inputs to produce more output, that translates to higher costs because businesses have to pay for those additional inputs, and in a tight supply market, that means paying higher prices. What we need to do is get more output with either the same, or even less, inputs. That is productivity growth. We increase productivity by investing in training so that workers can be innovative in their jobs and find better ways to do things. Productivity gains also come from business investment in new capital equipment and technology that improve processes, making it easier and more efficient to get work done. It also comes from streamlining business and consumer oversight by improving regulatory processes and making governments work together. These types of changes are key to reducing the cost of living.

What this might mean for you

Continued pressure from excess demand domestically and disruption in international energy markets will make it likely that the RBA will need to raise rates again. Markets have priced in two more rate rises, including one in November. But they are not a given. Much will depend on CPI numbers in the next few months. If those numbers fall, there may be an argument to wait and let the four rates hikes already made this year, work their way through the economy. While rate hikes impact mortgages almost immediately, other channels for monetary policy - savings, exchange rates and wealth - take longer to show up in economic activity.

While higher interest rates add pressure on households with mortgages, they also provide opportunities for savers to get higher returns on their money. The weakness in house prices might be attractive for some buyers and provide opportunities for others to ‘trade up’ their existing property.

Finally, there are opportunities for everyone to contribute to productivity gains by taking part in training opportunities, constantly looking for better ways to do their jobs, and speaking up about innovative opportunities they see at work.