Economic Indicators Overview
The price indicator for purchase costs increased at a quarterly rate of just 1.1%, the lowest since 2021. Meanwhile, quarterly growth in retail prices reduced to 0.5%. Labour costs also dropped, moving from 1.9% to 1.5%. This data reflects positive economic developments across areas and industries in the country.
The drop in business confidence to 4 looks worrying at first, but the underlying details suggest a different story for the Australian economy. Business conditions actually improved to their long-run average of 7, which tells us that what businesses are *doing* is better than how they are *feeling*. We need to focus on the hard data within the report, not the headline sentiment.
The most critical information for us is the sharp cooling in inflation indicators within the survey. Purchase costs, retail prices, and labour costs all recorded their slowest growth rates since 2021. This confirms the trend we saw in the official Q2 2025 CPI data, which showed headline inflation falling to 3.1% and gives the Reserve Bank of Australia (RBA) significant breathing room.
This disinflationary trend, combined with a resilient economy, means the market’s pricing for any further RBA rate hikes looks increasingly unlikely. We should be looking at positions in interest rate futures that will profit from a more dovish RBA over the next few months. The probability of a rate cut before mid-2026 is now substantially higher than it was last week.
Forward-Looking Economic Strength
Furthermore, the real strength is in the forward-looking components of the report. Forward orders turned positive for the first time in two years, and the employment index rebounded strongly to +6. This data aligns with the latest report from the Australian Bureau of Statistics, which showed the unemployment rate holding steady at 4.0% in August 2025, beating expectations for a rise.
This “soft landing” scenario, where inflation cools without crushing economic activity, is very bullish for equities. A less aggressive RBA puts downward pressure on bond yields, making future company earnings more valuable. We should consider buying call options on the ASX 200, as the index is likely to re-price based on this improved outlook.
For the Australian dollar, the implications are more bearish in the short term. A central bank that is finished hiking while others, like the U.S. Federal Reserve, remain vigilant will likely lead to a weaker currency. We should anticipate the AUD/USD exchange rate to come under pressure as interest rate differentials move against it.
