Re-thinking inflation: A Regime-Based Framework for Australia
Key takeaways
- Four distinct inflation regimes emerge from the data based on sub-index attributes. These are: volatile shock & administered prices, broad domestic pass-through, persistent administered & services inflation, and tradable goods disinflation.
- Broad domestic pass-through is the central inflation engine. It is the largest regime, the most frequent driver of headline inflation and the regime most closely linked to trimmed mean inflation.
- Volatile shock inflation matters for headline CPI, but has much weaker underlying inflation content. This supports the interpretation that fuel, electricity, travel and other shock-sensitive components can move headline CPI without necessarily changing the medium-term inflation process.
- Tradable goods inflation has historically acted as a disinflationary offset, but remains important for inflation turning points. This regime does not usually dominate headline CPI, but its relationship with trimmed mean inflation suggests it contains useful information about shifts in underlying inflation momentum.
- Inflation breadth is critical for policy. A narrow shock can often be looked through, but inflation becomes more policy-relevant when price pressures broaden into domestic pass-through and persistent administered or services inflation.
- Policy implications: Lower headline inflation is not sufficient to justify a durable easing cycle if broad domestic pass-through and persistent services inflation remain elevated. The RBA is likely to need evidence that the regimes most closely linked to trimmed mean inflation are cooling before policy can move sustainably towards easing.
- Portfolio construction implications: The appropriate investment response depends on both the inflation regime and the investment horizon. Volatile shocks favour liquid tactical hedges such as commodities and energy; broad domestic pass-through favours pricing power, resilient cash flows and balance-sheet strength; persistent services inflation increases the value of regulated or contractual indexation; and durable tradables disinflation supports duration and other rate-sensitive assets. Strategic resilience can be achieved by combining these macro-sensitive exposures with more macro-insulated assets such as unlisted infrastructure.
Australian inflation is best understood as four regimes
This paper develops a data-driven framework for understanding Australian inflation by identifying common inflation ‘regimes’ across the 87 consumer price index (CPI) expenditure sub-classes. Rather than starting with conventional classifications such as goods versus services or tradables versus non-tradables, the analysis groups CPI categories according to their inflation behaviour, including trend inflation, volatility, persistence, tail risk, seasonality, post-pandemic behaviour and relationships with headline and trimmed mean inflation. We dispense entirely with expenditure categories and are guided only by the data.
To do this we employ agglomerative hierarchical clustering, with the methodological innovation to extend this concept as we have used in prior asset-return work[1] from simple co-movement analysis to a richer inflation-process feature space, allowing CPI categories to be grouped by how they behave as inflation regimes rather than by where they sit in the expenditure basket.
The objective is to provide an alternative, and arguably richer, lens for interpreting inflation, monetary policy and portfolio implications. The four regimes represent different economic environments: volatile cost-push and administered-price shocks; broad domestic pass-through associated with demand, capacity and labour-cost pressures; persistent services and administered inflation; and tradable goods disinflation associated with global competition, technology and supply conditions. The central finding is that broad domestic pass-through is the dominant inflation process. It accounts for the largest share of the CPI basket, is the most frequent driver of headline inflation and has the strongest relationship with trimmed mean inflation. The framework also provides a potential path to future analysis to assess how longer-run forces, including deglobalisation, the energy transition, demographic change and capacity constraints, could alter the balance between these regimes.
The analysis suggests that the inflation outlook should be assessed not only at the headline level but also by which regime is driving inflation. This has direct implications for the Reserve Bank of Australia’s (RBA), policy rates and portfolio construction. It also extends the inflation factor insights in our paper Macro-factors revisited: an evolving approach to portfolio resilience (2025) by showing that inflation itself is not a single macro exposure but a set of distinct processes with different asset-class implications.
The information presented on this webpage provides an overview of the white paper 'Re-thinking inflation: A regime-based framework for Australia'. For full details, including all disclaimers applicable to the data contained herein, please refer to the complete white paper.
Alex Joiner
Alex Joiner is Chief Economist at IFM Investors. He is responsible for the firm’s economic, financial market and geopolitical risk analysis that is key in IFM’s investment process. In this capacity he engages with IFM’s domestic and global clients on macro-investment trends and themes.
Chris Skondreas
Chris supports the Chief Economist with the firm's economic, financial market, and policy analysis and forecasting. He holds a Bachelor of Commerce (Economics and Finance) from Monash University.
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