Inflation is drifting lower, but the policy story isn’t over. The Australian Bureau of Statistics reported headline CPI at 3.4% in November, down from 3.8% year-on-year. That’s movement in the right direction, yet still above the Reserve Bank of Australia’s 2–3% target band. Markets are recalibrating around a longer hold, and—if price pressures prove persistent—a residual risk of another hike. Westpac IQ flagged in mid-2025 that an eventual cut was likely, but “no shoo-in,” a framing that still applies given today’s cross-currents. For business leaders, the macro signal is clear: treat this as a window to harden balance sheets and pursue productivity-linked investments, not a green light to relax.

What the data really says: inflation composition matters more than the headline

While the 3.4% headline suggests progress, the composition of inflation is what drives central bank decisions. Tradables categories (often influenced by global goods prices) have cooled faster; non-tradables and services remain resilient due to wages, rents and insurance dynamics. Central banks typically look beyond volatile components to measures of underlying pressure. In Australia, “trimmed mean” inflation is the bellwether for the RBA’s reaction function, and its descent has been slower than the headline. That asymmetry keeps policy makers cautious.

Labour market signals are softening but not weak enough to force an immediate pivot. The RBA’s November 2025 Statement on Monetary Policy noted a 0.2 percentage point uptick in the unemployment rate in September, consistent with a gradual rebalancing. A modest easing in labour demand helps, yet services inflation can remain sticky if wage growth stays firm and productivity doesn’t catch up.

Policy path: a slower pivot, with a non-trivial tail risk of further tightening

Two scenarios deserve equal attention:

• Baseline: a prolonged plateau. The cash rate remains elevated while inflation glides toward target. Cuts, when they arrive, come late and gradually.
• Tail risk: data surprise on services inflation and wages. The RBA tightens once more to cap second-round effects and anchor expectations.

Both scenarios keep the cost of capital high relative to the pre-pandemic decade. Fiscal settings outlined in the 2025–26 Budget point to targeted spending and structural priorities rather than aggressive demand stimulus, implying monetary policy remains the primary tool for disinflation.

Business impact: operational and P&L effects you can quantify now

The cash rate’s “higher-for-longer” profile bleeds into working capital, capex hurdle rates and consumer demand:

• Debt service and refinancing: A 100-basis-point change in the cash rate can translate into meaningful shifts in interest expense for floating-rate exposures and shorter-tenor debt. Firms with interest coverage ratios below 3x should prioritise deusing or covenant headroom.
• Working capital: Days sales outstanding tend to extend in tighter conditions; CFOs should model a 5–10 day stretch risk and stress test liquidity buffers accordingly.
• Pricing power and elasticity: Sectors with strong brand equity or regulated pricing (e.g., utilities, some healthcare services) retain better pass-through. Discretionary retail faces tighter elasticity, though population growth and wealth effects from housing can provide offsets at the premium end.
• Property-sensitive sectors: Real estate and construction remain capex-intensive and rate-sensitive. Industry sources note ongoing buyer competition and demand pockets, but the cost of finance continues to filter through feasibility assessments and valuations.

Competitive advantage: where early movers gain share

In late-cycle conditions, advantage accrues to operators who act before the pivot:

• Procurement and cost engineering: Lock multi-year input contracts where supply volatility persists. Treat insurance costs—currently a material inflation component—as a strategic sourcing category with analytics-driven claims prevention.
• Balance-sheet agility: Rebalance fixed versus floating debt; consider layering hedges to stagger exposure. Renegotiate covenants proactively while lender appetite is stable.
• Price architecture and revenue management: Shift from across-the-board increases to micro-segmentation, attaching price to demonstrable value (speed, reliability, sustainability attributes). A/B test thresholds quarterly; hardwire elasticity learnings into SKU and service mix.
• M&A readiness: Valuation dispersion widens as rates stay high. Build target lists and diligence playbooks now; optionality is an asset when policy eventually eases.

Technology and productivity: invest where rates hurt least and payback compounds

Higher borrowing costs raise hurdle rates, but the ROI on productivity technology still clears the bar if savings are structural and compounding. Automation, analytics and cloud modernisation that reduce unit costs and shrink cycle times remain defensible bets. Australia’s AI ecosystem shows a commercialisation gap, according to 2025 analysis of local capabilities and adoption: development is robust, but translating proofs-of-concept into scaled products lags. That is a strategic opening. Firms that build disciplined AI delivery pipelines—governance, data quality, model monitoring—monetise faster and with lower risk.

Governance also matters. The Australian Government’s 2024 consultation on AI emphasised safeguards for general-purpose systems. Enterprises deploying AI in credit, pricing or hiring should align to Australia’s AI Ethics Principles and implement human-in-the-loop controls—particularly salient when macro conditions amplify model risk.

Market trends: what to watch on your macro dashboard

• Services vs goods inflation: The speed at which services disinflate will determine the RBA’s tolerance for cuts. Monitor quarterly trimmed-mean prints and wage growth.
• Labour market rebalancing: A gradual rise in unemployment or underemployment relieves pressure; a sudden jump risks demand shock.
• Housing and rents: Persistent rent growth feeds non-tradables inflation. Developers’ financing costs and supply constraints interact with CPI via shelter costs.
• Global spillovers: Energy and shipping costs can re-ignite tradables inflation. Hedge commodity exposures where feasible.

Implementation reality: turn uncertainty into a controlled variable

Adopt a two-speed plan:

• Rate-sensitive playbook (0–6 months): Extend debt maturities, diversify funding sources, and pre-commit to cost take-outs with fast payback (12–18 months). Install weekly liquidity flash reports and a rate-sensitivity heat map by business unit.
• Productivity and growth playbook (6–24 months): Prioritise projects with operational leverage—supply chain digitisation, AI-assisted service workflows, and energy efficiency upgrades. Use real options logic: stage-gate investments to preserve upside while limiting capital at risk.

Governance is the anchor. Establish a macro committee (CFO, COO, CHRO, CRO) to align pricing, hiring and inventory decisions with rate scenarios. Tie executive KPIs to free cash flow conversion and inventory turns, not just revenue growth.

Outlook: patience rewarded, but only for those who prepare

The inflation downshift is encouraging, yet the last mile is the hardest. The RBA will need clearer evidence that underlying pressures are contained before easing. If disinflation broadens and the labour market cools in an orderly fashion, we may see a policy inflection later than equity markets would prefer, and earlier than chronic pessimists predict. Until then, treat higher rates as the steady state. Build resilience, pursue productivity, and keep dry powder for targeted expansion. When the pivot comes, those who invested in capability—pricing, procurement, data, AI—will compound gains through the next cycle.