A bumper wage rise for low-paid workers could put pressure on a category of inflation data closely watched by the Reserve Bank.
From July 1, workers on award wages received a 4.75 per cent boost to their pay packets, which could result in a rise in market services inflation.
Market services are an important component of the consumer price index because they tend to be stickier than other items such as fuel and holiday travel, and give the RBA a valuable gauge of home-grown inflation.
Westpac economists Justin Smirk and Neha Sharma expect July inflation data, due to be released by the Australian Bureau of Statistics on Wednesday, will show a monthly rise of 0.5 per cent in market services, excluding volatile items.
Market services have been softer than expected in recent months but the Fair Work Commission wage decision could change that.
"Domestic market services inflation may prove stronger than we have accounted for given the larger-than-expected minimum wage decision amid existing pressures for businesses including from retail rents and utilities," Mr Smirk and Ms Sharma said.
They expect market services excluding volatile items to be about 3.3 to 3.5 per year through the second half of 2026.
"Just how businesses responded to the recent increase in award/minimum wage rates of pay will be critical to this profile and we will know more as the September quarter data unfolds," the duo said.
Minutes from the RBA's August board meeting, released on Tuesday, showed the board was particularly concerned about elevated market services inflation.
That could be a reflection of capacity pressures and pass-through of higher costs from the Middle East conflict, the minutes said.
Part of the reason the board considered raising interest rates at its previous meeting was the risk that the conflict could cause oil prices to stay elevated and businesses could pass more costs on to consumers than assumed.
Fuel costs are also expected to be a key contributor to inflation in July.
The addition of 16c to the fuel excise at the start of the month and higher oil prices flowing from the re-escalation in the Middle East conflict was forecast to drive a 5.1 per cent rise in automotive fuel following a 10.9 per cent fall in June, Mr Smirk and Ms Sharma said.
On a monthly basis, Westpac expects headline CPI to swing from a 0.1 per cent fall in June to a rise of 0.8 per cent.
But annual inflation is expected to ease from 3.8 per cent to 3.3 per cent.
That is largely because electricity prices are set to fall for the month, compared with a jump of 14 per cent the previous July as government energy rebates rolled off.
Westpac also expects the trimmed mean, a measure of underlying inflation that strips out volatile items, to fall on an annual basis to 3.5 per cent from 3.6 per cent in June.
That would put the quarterly trimmed mean - the RBA's preferred inflation measure - on track for a 0.8 per cent increase in the September quarter.
"For end-2026, we now estimate trimmed mean inflation to come in at a 3.3 per cent yearly pace, down from our earlier estimate of 3.5 per cent annual and on par with the RBA's most recent estimate," Mr Smirk and Ms Sharma said.
Australian Associated Press