The Reserve Bank of Australia (RBA) aims for consumer prices to rise by about 2.5 % each year. Governor Michele Bullock has warned that, in recent years, prices have already jumped 20‑25 % across the economy.

To keep price growth near that target, the RBA lifts interest rates. It does this to slow the speed of price rises, not to force companies to cut their prices. Higher rates make borrowing more expensive, which reduces demand and eases pressure on sellers.

Inflation is often described as “baked into the system”. Once prices have moved up, they do not automatically come back down, so the overall price level keeps climbing over time.

The RBA cannot control external shocks such as higher fuel costs caused by overseas conflicts or climate‑related spikes in food prices. Instead, it tightens financial conditions at home to limit how quickly those external pressures translate into higher consumer prices.

Because tighter monetary policy also slows the economy, unemployment has risen to 4.6 %, up from 4.5 % in July. This rise is a direct side‑effect of the RBA’s effort to keep inflation in check.

For everyday Australians, the 2.5 % target matters because it determines the pace at which living costs increase, influences wage negotiations, and shapes the job market. Even without falling prices, the target guides the RBA’s actions that affect your pocket.