Inflation is heading in the right direction, but the Reserve Bank of Australia (RBA) is unlikely to declare victory. The Australian Bureau of Statistics reported annual CPI of 3.4% in November, down from 3.8% a month earlier, easing pressure but still above the RBA’s 2–3% target band. Market commentary has turned hopeful — Westpac IQ has flagged a July cut as “no shoo‑in” — yet the central bank’s bias remains data‑dependent and cautious. For executives, the signal is clear: plan for rates to stay restrictive longer than headlines suggest, and position for an uneven disinflation that keeps services inflation sticky.

Signal vs noise: what’s really easing — and what isn’t

Not all inflation is created equal. Headline CPI has benefitted from disinflation in tradables (fuel, some goods categories), while non‑tradables and services remain elevated — the very components most responsive to domestic wages and capacity constraints. The RBA’s communication through 2024 and into its November 2025 Statement on Monetary Policy emphasised two themes that still matter: underlying inflation measures (such as trimmed mean) are the decisive gauges, and labour‑market cooling has been modest (the Bank later noted a 0.2 percentage‑point uptick in unemployment in September 2025, signalling early slack but not a downturn). That combination argues for patience, not a rapid pivot.

Global context is no help either. The US Federal Reserve’s October 2025 minutes underscored reluctance to ease prematurely amid persistent inflation risk. When the world’s benchmark central bank is wary, the “higher for longer” baseline remains the prudent planning scenario for Australian treasurers.

P&L and cashflow math: why marginal rate moves matter more than headlines

For interest‑sensitive sectors — housing, retail, automotive, discretionary services — a 25–50 basis‑point swing in the cash rate can be decisive for demand, working capital, and interest cover. Property investors, as noted by industry press, remain in a competitive market backdrop with rising prices and strong demand, yet debt serviceability remains the governor on expansion. In retail, the 2024 Australian Retail Outlook pointed to population growth and the wealth effect supporting spend, but warned that interest‑rate settings still dampen big‑ticket purchases and elongate inventory turn.

Executives should re‑run sensitivity tables at today’s actual funding costs, not modelled averages. A practical rule: for every 100 basis points of effective borrowing‑cost reduction, many leveraged operators recover 50–150 basis points of EBITDA margin through lower interest expense and improved volume elasticity — but only if input costs don’t re‑accelerate. Until services inflation breaks decisively lower, assume only partial pass‑through to margins.

Competitive advantage in the grey zone: price, cost, and capital discipline

Periods of disinflation with restrictive rates favour firms that can simultaneously hold price, compress cost, and redeploy capital. Three levers stand out:

1) Pricing and product mix. Shift from across‑the‑board rises to “surgical pricing”: index contracts to CPI with caps/floors, emphasise value tiers, and use mix upgrades to protect gross margin as headline inflation cools. Buyers will now push back — sharpen the value story and remove low‑contribution SKUs to limit discount contagion.

2) Productivity capex. Automation and AI remain the most reliable hedge against wage‑driven services inflation. Yet Australia’s AI ecosystem still shows a commercialisation gap, according to a June 2025 ecosystem review: adoption outpaces monetised innovation. That signals opportunity with execution risk. Back projects with measurable throughput gains (e.g., order‑to‑cash automation, demand forecasting) and stage‑gate funding to preserve IRR if rates stay high.

3) Capital structure agility. Balance fixed–floating exposure via swaps and options to build an “RBA‑agnostic” funding profile. Treasury teams should target duration ladders that create 12–18 month optionality. A modest fall in inflation without a clear easing cycle is the sweet spot for refinancing windows; be ready to pre‑hedge.

Market trends and sector exposure: where the pain eases first

- Housing and construction: Lower headline CPI improves consumer sentiment, but developer feasibility still hinges on funding costs and build inflation (materials and labour). Expect staggered recovery: land and detached housing stabilise first; complex apartment projects lag until financing loosens.

- Consumer and retail: Essentials hold up; discretionary categories rebound later. Promotional intensity remains high as retailers trade price for volume. Inventory discipline and supplier terms (shorter lead times, CPI‑linked clauses with caps) are now core capabilities.

- Business services: Wage pressure and utilisation rates will determine margin outcomes. Contracting models that use indexed rate cards and outcome‑based fees outperform flat‑fee exposure during sticky services inflation.

- Technology and digital: Valuation multiples remain sensitive to discount‑rate expectations. Still, cash‑generative software with pricing power outperforms hardware‑heavy models. For Australian CIOs, 2024–2025 surveys indicated progress on technology roadmaps but uneven maturity; prioritise projects with 12–24 month paybacks given rate uncertainty.

Implementation reality: a CFO/COO checklist for the next two quarters

- Re‑base budgets to 3–3.5% headline CPI with sticky services assumptions; treat any rate cut as upside, not plan‑critical.

- Migrate customer and supplier contracts to CPI‑linked mechanisms with collars. Where possible, move from annual to semi‑annual adjustments to reduce lag risk.

- Treasury: Model three scenarios — Hold (no change), Shallow Cut (25–50 bps in H2), and Re‑acceleration (inflation flare‑up). Set hedge ratios and liquidity buffers that work in all three.

- Labour: Tie variable remuneration to productivity and gross margin, not revenue alone. Fund targeted automation (e.g., finance close, customer service triage) to offset wage drift; the ATO’s work on AI governance underscores the need for controls as you scale these tools inside regulated environments.

- Pricing analytics: Deploy SKU‑level and customer‑cohort elasticity models. When inflation cools, elasticity rises; don’t leave price on the table through undisciplined discounting.

What’s next: scenarios and signals that matter

The market’s “base case” looks like gentle disinflation and a cautious RBA. Westpac IQ’s July‑cut call — with the caveat that it’s no certainty — fits that narrative. The RBA’s own emphasis on the labour market as a leading indicator still holds; the Bank’s later commentary in 2025 acknowledged early signs of slack, but not enough to declare mission accomplished. Watch three signals:

1) Underlying inflation prints. If trimmed mean persistently trends toward the 2–3% band, probability of a cut rises materially.

2) Wage growth vs productivity. If wage gains outstrip productivity, services inflation remains sticky and cuts are delayed.

3) Global policy stance. A hesitant Fed extends Australia’s restrictive settings indirectly via financial conditions and currency dynamics.

Board takeaway: don’t anchor plans to the next 25 bps. Anchor them to resilience. The upside scenario rewards prepared balance sheets with cheap optionality; the downside punishes firms that bet the farm on rapid easing.

In short, inflation is easing, but the rate pathway is still contested. Leaders who treat this as a design challenge — re‑architecting pricing, contracts, and capital — will emerge with structurally higher margins when the cycle finally turns.