Inflation remains above the Reserve Bank of Australia’s target band heading into 2026, though the trajectory is clearly downward from 2024 peaks. Understanding where inflation pressures are easing, where they persist, and how this affects business planning is essential for realistic budgeting and strategy.

Headline CPI ended 2025 at approximately 3.8%, down from over 5% in early 2024 but still outside the 2-3% target range. The RBA’s preferred trimmed mean measure shows similar patterns, suggesting underlying inflation is proving stickier than headline numbers might suggest. This creates challenging conditions for both monetary policy and business planning.

Services inflation remains elevated, driven primarily by wage pressures and housing costs. These components are proving much more persistent than goods inflation, which has eased significantly as supply chains normalized and global goods prices moderated. The split between services and goods inflation creates different implications across business sectors.

Labor-intensive service businesses face ongoing cost pressure as wage growth runs ahead of productivity improvements. The Fair Work Commission’s minimum wage decisions, award variations, and tight labor markets in specific sectors all contribute to wage growth that businesses must either absorb in margins or pass through to customers. This dynamic will continue through 2026.

Housing-related costs—rent and new dwelling construction—remain significant inflation contributors. These costs flow through to businesses both directly through commercial property rents and indirectly through residential rental costs that affect required wage levels. The RBA’s concern about housing inflation partly explains its cautious approach to rate cuts.

Energy costs have stabilized after earlier spikes but remain elevated compared to historical levels. Electricity and gas prices affect almost every business sector, with particularly severe impacts on manufacturing and other energy-intensive industries. Government intervention through energy bill relief provided temporary respite but doesn’t address underlying supply constraints and network costs driving prices higher.

Food price inflation has moderated from earlier peaks but continues running above headline CPI. This reflects ongoing cost pressures in agricultural production, processing, and retail distribution. Businesses in food production and retail face difficult decisions about pricing—absorb costs and compress margins, or pass through and risk demand destruction.

Import prices influence inflation through multiple channels. The Australian dollar’s value against trading partner currencies affects imported goods prices. With the AUD trading relatively weak against the USD but more stable against Asian currencies, import price pressures vary significantly across product categories. Businesses sourcing from different regions face different inflation dynamics.

Insurance costs across most categories increased sharply through 2025 and show little sign of moderating. Property insurance, liability coverage, and workers compensation all saw double-digit premium increases driven by higher claims costs, natural disaster frequency, and global reinsurance market dynamics. These costs hit bottom lines directly and don’t correlate with revenue, making them particularly painful for businesses with thin margins.

Supply chain costs normalized significantly through 2025 after pandemic-era chaos, but they haven’t returned to pre-2020 levels. Freight costs, packaging materials, and logistics services all remain more expensive than businesses budgeted historically. This represents a permanent step-change in cost structures that many businesses are still adapting to.

The business-to-business inflation picture differs somewhat from consumer inflation measures. B2B services often involve longer contract durations that lock in pricing for extended periods, creating lag between underlying cost pressures and realized price increases. This means B2B inflation may peak later than consumer inflation but also persist longer.

Pricing power varies enormously across sectors and business models. Companies with strong brands, differentiated products, or limited competition can pass cost increases to customers more readily. Businesses in competitive markets with commoditized products face much more difficult pricing decisions, often absorbing cost increases that compress margins.

The inflation expectations of businesses and consumers matter significantly for actual inflation outcomes. If businesses expect high inflation to persist, they’re more likely to set aggressive pricing and wage increases that become self-fulfilling. Managing inflation expectations is partly why central banks move cautiously even when data shows disinflation progress.

Budgeting for 2026 should assume inflation remains above RBA targets through at least the first half of the year, with potential for moderation toward target in the second half. This suggests planning for:

• Wage increases of 3.5-4.5% to retain staff and meet award requirements
• Energy costs stable to slightly rising
• Occupancy costs increasing 3-4% for commercial property
• Insurance premiums rising 8-12% across most categories
• General input costs increasing 2-4% depending on sector

These planning assumptions create meaningful bottom-line pressure for businesses that can’t pass costs through to revenue. Margin compression is likely across many sectors unless productivity improvements offset cost growth.

Productivity improvement has become the critical variable separating businesses maintaining profitability from those seeing margins erode. Technology investment, process optimization, and workforce development that drive output-per-employee growth create capacity to absorb cost increases. AI consultants in Melbourne and other major cities are seeing increased demand from businesses looking to offset cost pressures through automation. Businesses that can’t improve productivity face increasingly difficult economics.

The disinflation process will eventually create more favorable operating conditions, but the timeline keeps extending. Business planning shouldn’t assume quick return to low, stable inflation but rather factor in continuing elevated price pressures through much of 2026.

Interest rate movements influenced by inflation will affect business financing costs. If disinflation progresses as the RBA hopes, rate cuts in the second half could reduce borrowing costs for variable-rate debt. However, businesses shouldn’t bank on substantial or rapid rate reductions given the RBA’s cautious approach and inflation persistence.

Currency impacts from inflation differentials between Australia and trading partners affect competitiveness. If Australian inflation runs persistently higher than major trading partners, real exchange rate appreciation hurts export competitiveness regardless of nominal exchange rate movements. Exporters need to monitor relative inflation carefully as it affects strategic positioning.

Looking at medium-term implications, the inflation episode of 2022-2026 is resetting business cost structures permanently higher. Even as inflation rates return to target, price levels remain elevated. This means businesses need to achieve sustained productivity growth just to maintain margins, and superior productivity performance to improve profitability.

The businesses adapting most effectively to this environment are those treating inflation as a structural challenge requiring operational response rather than a temporary disruption to be weathered. This means systematic focus on productivity, careful cost management, strategic pricing decisions, and realistic planning assumptions that don’t expect easy conditions to return.

Inflation will continue shaping business decisions through 2026, though hopefully with declining influence as rates moderate toward target. Understanding the components driving inflation, how they affect specific business sectors, and what policy responses are likely allows for better planning than simply reacting to backward-looking price indices.