ABE Weekly: IMF Urges Australia to Tackle Inflation and Lift Productivity

Market Insights

• IMF Urges Australia to Tackle Inflation and Lift Productivity
• US Inflation Accelerates
• US Consumer Confidence Near Record Lows
• China’s Export Boom Masks Domestic Weakness

IMF Urges Australia to Tackle Inflation and Lift Productivity

Key Points

• Australia: The RBA increased cash rates by 0.25% to 4.60% p.a. at its September meeting – its 4th increase in 2026! August CPI increased to 4.0% p.a., while Trimmed Mean was unchanged at 3.60% p.a.
• United States: The Federal Reserve raised the federal funds target range by 25bp to 3.75%–4.00% p.a. at its September 2026 meeting, its first rate hike since July 2023. The latest U.S. CPI inflation rate accelerated to 3.7% p.a. in September 2026, while core CPI increased to 2.6% p.a.
• United Kingdom: The Bank of England held Bank Rate unchanged at 3.75% p.a. at its September 2026 meeting. Headline CPI rose to 3.1% p.a. in August, while core CPI remained unchanged at 2.6% p.a.
• Eurozone: The European Central Bank increased its key deposit facility rate by 25bp to 2.50% p.a. at its September 2026 meeting. Euro area headline CPI rose to 3.8% p.a. in September, while core inflation rose to 2.5% p.a.

Here are the latest monetary-policy and inflation figures for key economies:

IMF Urges Australia to Tackle Inflation and Lift Productivity

Australia faces a challenging economic outlook, with inflation expected to remain elevated and unemployment projected to rise further in 2027, according to the International Monetary Fund’s (IMF) latest forecasts. The outlook adds to the pressure on policymakers as households continue to contend with persistent cost-of-living pressures.

In its October 2026 World Economic Outlook, the IMF projects Australian economic growth to slow to 1.6% in 2027, down from 1.9% in 2026. Inflation is expected to ease to around 3.1% next year, but remain above the Reserve Bank of Australia’s 2–3% target band. Unemployment is forecast to reach 4.7%, representing a significant deterioration in the labour market. Australia is also projected to have one of the highest inflation rates among advanced economies and the largest increase in unemployment within that group.

The IMF argues that restoring price stability will require a careful balance between monetary restraint and fiscal discipline. Government spending needs to be managed carefully to avoid adding to inflationary pressures, while monetary policy must remain responsive to the evolution of prices and economic activity.

Beyond the immediate inflation challenge, the IMF has highlighted Australia’s longstanding productivity problem. Improving business competition, reducing unnecessary regulatory barriers, accelerating housing construction and encouraging investment will be important to strengthening the economy’s productive capacity.

For Australia, the challenge is not simply to bring inflation under control, but to do so without unnecessarily weakening employment and growth. Successful reforms could help lift productivity, improve housing affordability and support stronger living standards over the longer term.

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US Inflation Accelerates, Raising Pressure on the Federal Reserve

The latest US Consumer Price Index (CPI) report for September showed inflation accelerating, reinforcing concerns that price pressures remain persistent and complicating the Federal Reserve’s interest rate outlook.

Headline inflation rose to 3.7% annually, up from 3.4% in August. Much of the increase was driven by higher energy costs, particularly gasoline prices, which surged 9.1% during the month. Core inflation, which excludes volatile food and energy prices, rose 0.3% for the month and 2.6% annually, suggesting underlying inflation pressures remain elevated.

Looking ahead, investors will closely monitor upcoming employment data and Federal Reserve commentary for further clues on the direction of monetary policy.

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US Consumer Confidence Near Record Lows

US consumer confidence continues to deteriorate as high living costs, rising fuel prices and concerns about the economic outlook weigh on household sentiment. However, consumer spending has proved more resilient than confidence indicators might suggest, supported in part by higher-income households with greater financial resources.

The University of Michigan’s preliminary Consumer Sentiment Index fell to 46.3 in October, down from 48.1 in September and 13.6% below its level a year earlier. The measure of current economic conditions dropped to 44.7, its lowest reading on record. The survey also showed one-year inflation expectations rising to 4.7%, from 4.6% in September, while longer-term expectations increased to 3.5%.

Higher energy costs are adding to household financial pressures, while elevated borrowing costs and uncertainty about employment are contributing to a more cautious outlook. The latest survey suggests that consumers remain particularly concerned about purchasing conditions, with high prices and financing costs discouraging some major purchases.

Despite the deterioration in sentiment, spending has held up comparatively well. Higher-income households, which generally have greater savings and more exposure to financial assets, have been better positioned to absorb rising costs and maintain consumption. Lower-income households, by contrast, have fewer financial buffers and are more vulnerable to increases in essential expenses.

This divergence highlights the increasingly uneven nature of the US economy. While wealthier consumers continue to support aggregate demand, persistent cost-of-living pressures could eventually lead to broader spending restraint. Any deterioration in financial markets or the labour market would add to that risk.

For investors and policymakers, the key question is whether resilient spending can be sustained while consumer confidence remains depressed. Weak sentiment alone does not necessarily signal an imminent contraction in consumption, but persistent inflation and mounting household pressures could weigh on growth if they begin to translate into a more widespread pullback in spending.

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China’s Export Boom Masks Domestic Weakness

China’s export performance strengthened sharply in September, with overseas shipments rising 36.3% year-on-year and the monthly trade surplus reaching US$133.5 billion. Imports also increased by 31%, reflecting stronger trade activity. The figures highlight the strength of China’s external sector, particularly in technology-related goods, but also underline the uneven nature of its economic recovery.

High-tech exports, including semiconductors and automotive products, were important contributors to the surge. China’s trade surplus for the first nine months of 2026 reached approximately US$938 billion, putting the country on course for another exceptionally large annual surplus.

However, robust exports contrast with subdued domestic demand and ongoing weakness in the property sector. Consumer inflation rose by just 0.9% year-on-year in September, while producer prices increased by 5%, their fastest annual rise since June 2022. Higher oil and commodity prices have pushed up manufacturing costs, but the limited increase in consumer prices suggests that domestic demand remains relatively weak.

The divergence between producer and consumer prices presents a challenge for policymakers. Manufacturers are facing higher input costs, but weak household demand may limit their ability to pass these increases on to consumers. If cost pressures persist, businesses could face further pressure on profit margins.

China’s reliance on exports also carries risks. A sustained trade surplus of this scale could intensify trade tensions with major trading partners, potentially increasing the threat of tariffs or other restrictions. At the same time, export strength may not be sufficient to compensate indefinitely for subdued household consumption and property-sector weakness.

For Australia, developments in China remain particularly important given the country’s role as a major trading partner and a key source of demand for Australian commodities. The central question is whether China can translate its export strength into a more balanced recovery driven by domestic consumption, while managing rising production costs and growing international trade tensions.

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