Economic Update September 2026

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

Geopolitics and macroeconomics remain captive of the Iran war and restricted crude oil supplies
Inflation, due to higher oil prices, is not falling as quickly as many would like
Expectations of higher inflation is keeping upward pressure on central banks to hold or raise rates

The Big Picture

The US-Iran conflict is still causing economic disruptions six months after it started. There have been frequent skirmishes in the Strait of Hormuz. The US is getting very frustrated and Iran seems prepared to tough it out. As a result, oil prices remain elevated but below their peaks earlier in the year.

Trump claims he has negotiated a deal with Venezuela that gives the US access to a reserve of 65 billion barrels of oil. Details have not yet been published. CNBC reported that it would take years to build the necessary infrastructure to be able to export that oil from Venezuela. As a result, Trump’s declaration that oil prices would soon fall is questionable.

The new US Federal Reserve (Fed) chair, Kevin Warsh, has received some criticism for not clarifying his view of the state of the economy. Warsh earlier did state that he is against forward guidance but that hasn’t placated the bond market. US 10-year and 30-year Treasury yields are elevated. In a sense, those increased yields are doing some of the work for the Fed.

Warsh, at the annual Jackson Hole central bank summit, gave a speech that some interpreted as indicating a willingness to raise interest rates. He commented on the stubbornness of the Fed’s preferred inflation measure – core Personal Consumption Expenditure (PCE) – to fall to the target of 2%. That measure was 3.3% for four of the last five months; two months ago, it was 3.5%.

An alternative measure of inflation – derived from the Consumer Price Index (CPI) – was also 3.3% but its core variant was only 2.5%. The last three readings were 2.8%, 2.6% and 2.5%, The headline variant of CPI inflation that doesn’t strip out volatile items was 4.2%, 3.5% and 3.3%, respectively.

Given that oil prices are the cause of much of the inflation we see, including the indirect effect through other goods and services, we see the set of US inflation data over the last three months as promising. Should the Fed choose to raise rates many analysts would argue that it would take six or more months for any effect to be noticed in the inflation data.

The Fed, like our RBA and other central banks, has a dual mandate: to maintain stable prices and full employment. There was enough in the latest labour force data for us to worry about the state of the US labour market.

The 12-month average number of US jobs created fell from over 350,000 p.m. at the start of 2023 to around 13,000 at February 2026. However, that average has since stabilised at just under 30,000 per month.

Monthly jobs data are notoriously difficult to interpret – particularly as revisions to previous data are often large. We do not think that there is enough in the data to cause panic. We do think that increasing interest rates from here would be unnecessary. Given that oil prices are largely unaffected by the Fed’s interest rate, we think it would be wiser for the Fed to keep its interest rate at the current range 3.50% to 3.75% and be prepared to start cutting its interest rate quickly if the labour force data were to deteriorate further.

The US growth estimate for the June quarter was confirmed at 1.5% annualised from a reading of 2.1% annualised for the March quarter.

We believe the situation in Australia is somewhat worse than that in the US. The RBA’s official cash rate (OCR) is 4.35% and we also think our neutral rate would also be in the range 2.5% to 3.0%. That is, the RBA has 1.35% to 1.85% percentage points of interest rate tightening baked in.

Our inflation data has been corrupted by the ABS’ attempt to incorporate government subsidies on electricity consumption as a price effect. As the rebates become a thing of the past, the ABS’s estimate for electricity price inflation is well above what it would be without the correction. The ABS did publish electricity price inflation with and without a rebate correction but stopped doing so a couple of months ago.

Headline CPI inflation for Australia was 3.5%. We have previously posted our calculations that show an upward bias due to the rebate effect in this statistic of about 50 bps. In other words, the uncorrected headline CPI rate is likely about 3.0% which is in the target range of 2% to 3%.

Housing rents in Australia, as in many countries, have been rising at an uncomfortable rate. We think an increase in the RBA OCR would likely worsen rent inflation as landlords seek to pass on cost increases.

We have adjusted the CPI reading to remove the component. Unlike in the US, the ABS do not officially post such a number. By our calculations, that measure currently also stands at 3.0% and it was 2.9% in the prior month (June). We see the full-employment target as needing the focus of the RBA.

The Australian unemployment rate rose to 4.5% in July, the latest month for published data. While 4.5% might not seem a high number when compared to rates from before the pandemic, we think the jobs problem needs to be addressed.

Since the Australian unemployment rate has trended up from 3.5% in mid-2022, we see the current 4.5% as a strong signal that the RBA interest rate needs to be cut.

Governor Bullock stated clearly at the beginning of the year that she believes interest rate changes take at least six months for their impact to be noted in the wider economy. That means there is yet no impact of any of the three rate hikes this year to be felt in jobs or inflation data.

Therefore, if the RBA does nothing, the three 2026 interest rate hikes will soon start to impact the jobs data. It is not just the unemployment rate that troubles us. Over the past 12 months, total employment has only grown by +1.3% and full-time employment has grown by +1.1%. Both of these growth rates are well below what we think is long-run population growth.

Wages data were released in August and they do not paint an optimistic picture. The Australian wage price index (WPI) grew by +0.8% for the quarter and +3.2% for the year. Private WPI growth was +0.7% and +0.9% for the public sector.

When we adjust the WPI for price inflation we note that the so-called real wages growth over the last 12 months was ‑0.7%. This reading marks the third consecutive quarter of negative growth.

Real wages are ‑6.6% below where they stood in mid-2020 and they have broadly tracked sideways since mid-2024. The cost-of-living-crisis continues to plague Australian households.

Meanwhile new highs were recorded on the S&P 500 and the ASX 200 during August 2026. Company earnings data in the US and Australia continue to impress. Markets look forward when pricing stocks.

Asset Classes

Australian Shares

Australian equities (ASX 200) rose by +1.1% during August. The Heath sector gained +18.7% and Materials +12.0% during the month. Four sectors lost more than ‑6%: Discretionary, Financials, Property, and Telcos.

International Shares

The S&P 500 gained +2.6% in August. The German DAX, Japan’s Nikkei and China’s Shanghai Composite each improved by more than +2.5%. Broader emerging markets gained +1.7%.

Bonds and Interest Rates

The RBA kept the OCR on hold at the August 11th meeting – at 4.35% which is 60 to 85 bps above the Fed funds rate. Australian inflation has been falling in recent months. However, the falls in inflation are not attributable to RBA action as there is a delay between its monetary policy changes and economic impacts. The market is not pricing any change to the OCR at the 29th September RBA meeting.

The Fed, which has not changed its interest rate since it cut it in December 2025, is now expected, by the market, to move on interest rates with the probability that they will, more likely than not, increase the rate at the next meeting.

The Fed chair, Kevin Warsh, is not giving strong hints about his thinking on interest rates or the economy. Longer-term yields have been rising in recent months but US President Trump is no longer openly demanding the Fed reduce its interest rate.

Other Assets

Brent Crude (‑0.9%) and West Texas Intermediate (WTI) (+1.3%) oil prices were volatile during August as talk of yet another solution to the free passage of shipping through the Strait of Hormuz came to light – and then the US and Iran renewed hostilities for the first time in a month.

The price of copper was up +4.4% and iron ore prices were up +4.1%. The price of gold was up sharply in August at +9.6%

The S&P 500 share market VIX volatility index ended August in the ‘normal range’ at 14.9 with an intra-month peak of 16.5.

The Australian dollar appreciated by +1.9% against the US dollar over August.

Regional Review

Australia

The Australian economy is weak but it is not yet in the realms of being near a recession. However, the three RBA interest rate hikes in the first half of 2026 have not yet taken effect.

The Westpac consumer sentiment index moved higher in August to 88.9 for 83.0. The NAB business indexes for conditions and confidence were largely unchanged.

The jobs market lost ‑15,800 positions but full-time jobs were up by +16,300. There was a sharp loss of ‑32,200 part-time jobs.

China

China exports rose by more than expected in July; they grew by +23.0% over 12 months. Imports also grew strongly at +27.5%.

Retail sales disappointed at only +0.6% when +1.5% had been expected. Industrial output also missed expectations at +4.5% compared to the expectation of +4.8%.

The China official PMI (purchasing managers’ index) for manufacturing rose to 49.8 from 49.2. Heading in the right direction but still below the key 50 mark which separates contraction from growth.

Jobs growth went unexpectedly backwards last month at ‑23,000 compared to the expected +83,000. The previous month’s estimate of +57,000 was revised downwards to +20,000. Data for the prior month to that (May) was revised down by ‑66,000 to 63,000. As noted previously monthly data points can be quite volatile.

Interestingly ‑53,000 jobs were cut from the government workforce. Hourly average wages grew by 3.2% over a 12-month period. This reading was the lowest recorded since May 2022.

Trump, in yet another round of attempting to use tariffs as a bargaining tool, said that he would increase tariffs on Canada to 50%. Canada retaliated.

The University of Michigan consumer sentiment index fell from 55.2 to 51.0 in August. This index stood at 74.0 at the end of 2024 which was just before Trump was inaugurated for his second term as President.

Current forecasts for the results of the US mid-term elections in November have the Democrats retaking the balance of power (majority) in the House of Representatives.

Europe

UK growth cooled from the March quarter to the June quarter, but survey data recorded a pick-up in growth over August. Inflation stood at 2.9%

European Union (EU) inflation remains above target but the European Central Bank (ECB) claims that the economy is showing more resilience than previously expected.

Rest of the World

Japan growth was +0.3% for the June quarter (annualised to +1.1%). CPI headline inflation stood at 3.1%.

We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.