Drop in inflation announced just a day after interest rates stay on hold

The rate of inflation has fallen to its lowest levels since August 2021, the Australian Bureau of Statistics revealed today. The news comes just a day after the Reserve Bank of Australia announced it would be keeping interest rates on hold at 4.35 percent.

The drop in the rate of inflation to 2.7 percent has been largely attributed to moderating prices of petrol and diesel, with automotive fuel 7.6 percent lower than a year ago, and electricity, which fell 17.9 percent over the same period.

Michelle Marquardt, head of Prices Statistics at Australian Bureau of Statistics, said the decrease in electricity prices was largely due to Commonwealth and State Government energy rebates in Queensland, Western Australia and Tasmania.

“Electricity fell 17.9 percent in the 12 months to August, which is the largest annual fall since the electricity series started in the early 1980s,” Ms Marquardt said. “Commonwealth Government and State Government rebates led to a 14.6 percent fall in electricity prices in the month of August, which followed a 6.4 percent fall in July.

“Excluding the rebates, electricity prices would have risen 0.1 percent in August and 0.9 per cent in July.”

The news was less positive for renters and those seeking to build or renovate, with rents up 6.8 percent over the past year and new dwelling prices also up by 5.1 percent.

Following a meeting of the RBA board yesterday, governor Michele Bullock announced that the cash rate would remain unchanged, citing persistently high inflation and economic uncertainties as major influences on the decision.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” Ms Bullock said in a statement. “But inflation is still some way above the midpoint of the 2–3 per cent target range.

“Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026. In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.”

While the decision to keep rates on hold was widely anticipated, it has raised eyebrows in some quarters given the US Federal Reserve announced last week it was dropping the official cash rate by 50 basis points. However, research director at CoreLogic Asia Pacific, Tim Lawless, says there was good reason for keeping rates on hold in Australia for now.

“Importantly, Australia hasn’t gone ‘as hard’ on monetary policy as most other Western nations, increasing the cash rate by 425 basis points compared with a 525 basis point increase in the US and NZ, and a 515 basis point rise in the UK,” he said.

“Also, our tightening cycle has lagged most other nations, with the cash rate increasing from May 2022 compared with the US where the hiking cycle commenced in March 2022 or the UK where interest rates started rising in December 2021, or NZ and the EU which commenced rate hikes even earlier, in October and July 2021 respectively.”

Ms Bullock said the RBA board would be keeping a close on labour markets both here and overseas as it navigates a path to sustained lower inflation at the target rate of between 2 and 3 percent.

“Sustainably returning inflation to target within a reasonable timeframe remains the board’s highest priority,” she said. “This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case.

“While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.”

A sharp technology sell-off has exposed a new anxiety on global markets: whether the enormous borrowing behind the artificial-intelligence infrastructure boom can generate sufficient returns as interest rates rise and Chinese competition intensifies.

The artificial-intelligence investment boom has powered technology shares, semiconductor manufacturers and data-centre operators to extraordinary heights. Last week, investors were given a reminder that much of this expansion is being built with borrowed money.

The technology-heavy Nasdaq Composite fell 4.5 per cent over the week ended October 16, its weakest performance since late June. Semiconductor shares suffered an even deeper correction, with the Philadelphia Semiconductor Index losing about 11.4 per cent.

The selling spread quickly through global markets. Micron Technology fell 14.6 per cent over the week, while South Korea’s Samsung Electronics and SK Hynix dropped approximately 18 per cent and 24 per cent respectively.

This was more than a routine bout of profit-taking. Investors were reassessing three interconnected risks: higher interest rates, the rapidly expanding debt burden attached to AI infrastructure and the prospect of stronger competition from Chinese memory-chip manufacturers.

The debt behind the AI build-out

Artificial intelligence requires a physical infrastructure network of enormous scale. Data centres must be built, advanced processors purchased, power supplies secured and cooling systems installed before customers begin generating meaningful revenue from them.

Technology companies are increasingly supplementing their own cash with corporate bonds, syndicated loans, equipment leases, private credit and project-level financing.

JPMorgan describes the emerging funding model as a combination of conventional corporate borrowing and project finance tied to individual data-centre assets. In Australia, the Reserve Bank estimates that syndicated loans accounted for approximately three-quarters of data-centre financing during 2025 and 2026 to date.

The numbers are becoming large enough to affect broader credit markets. The Federal Reserve Bank of Dallas has cited Wall Street estimates suggesting AI-related investment-grade bond issuance could approach US$300 billion in 2026 alone.

That borrowing is not automatically problematic. Debt can be an efficient way to finance long-lived infrastructure when future revenue is sufficiently predictable. The concern is that AI technology, customer demand and computing economics are changing much faster than the repayment schedules attached to the assets.

A data centre financed today may carry debt for years. Investors must therefore make assumptions about future utilisation rates, electricity prices, chip performance, customer concentration and the amount businesses will ultimately pay for AI computing.

When interest rates rise, those assumptions become less forgiving.

Inflation changes the calculation

September’s US inflation data intensified the pressure. Consumer prices increased 3.7 per cent over the year, ahead of market expectations and up from 3.4 per cent in August.

The hotter reading reduced confidence that interest rates would fall quickly and pushed bond yields higher. That matters particularly for companies whose valuations depend on profits expected well into the future, as well as highly leveraged infrastructure operators that may need to refinance.

CoreWeave has emerged as a closely watched test case. The specialist cloud-computing company has accumulated substantial debt and lease obligations to build AI capacity, while relying on a concentrated group of large technology customers.

Its shares fell sharply during the sell-off, while the cost of insuring its debt against default climbed. CoreWeave has argued that its contracted backlog more than covers its obligations and that financial markets do not always understand its business model. Nevertheless, its securities have become a proxy for investor confidence in debt-funded AI infrastructure.

Oracle, another major investor in AI computing capacity, fell 8.8 per cent in Friday trading, while CoreWeave dropped 15.5 per cent.

The question is shifting from how much AI infrastructure can be built to how profitably it can be operated.

China adds another source of pressure

Interest rates were not the only catalyst. Reports of advances by Chinese memory-chip producer ChangXin Memory Technologies raised concerns that lower-cost Chinese products could increase competition across the global semiconductor industry.

Memory chips are essential to AI systems, but the industry is historically cyclical. Periods of tight supply and high pricing can encourage rapid investment, eventually producing oversupply and falling margins.

The prospect of a well-funded Chinese competitor expanding its technological capabilities unsettled investors in Samsung, SK Hynix and Micron. It also demonstrated that AI-related demand does not insulate chipmakers from conventional competitive pressures.

That combination—slower rate cuts, more expensive financing and potentially cheaper supply—challenged the assumption that every company exposed to AI would enjoy continually expanding margins.

A reset rather than the end of the boom

The sell-off does not establish that the AI boom is ending. Demand for computing power remains strong, the largest technology companies continue to generate formidable cash flows and many infrastructure projects are backed by long-term customer contracts.

What has changed is the market’s willingness to overlook the price and financing structure of that growth.

The most resilient companies are likely to be those able to fund investment from operating cash flow, secure long-duration customers and demonstrate that new capacity will earn returns comfortably above its financing costs.

More speculative operators may face greater scrutiny, particularly where debt is expensive, customers are concentrated or expected revenue depends on demand that has not yet materialised.

For Australian investors, the lesson extends beyond US technology shares. Local data-centre operators, infrastructure funds, electricity suppliers and property groups are increasingly exposed to the same investment cycle.

Artificial intelligence may remain one of the defining growth themes of the decade. But last week’s correction showed that enthusiasm for the technology does not eliminate financial discipline.

The next stage of the AI boom will be judged not only by computing power, model performance or demand for chips, but by something more traditional: whether the assets being financed can generate enough cash to repay the money borrowed to build them.

Fact box

Nasdaq Composite: Down 4.5 per cent for the week ended October 16, 2026

Philadelphia Semiconductor Index: Down approximately 11.4 per cent

Micron Technology: Down approximately 14.6 per cent

Samsung Electronics: Down approximately 18 per cent

SK Hynix: Down approximately 24 per cent

US September inflation: 3.7 per cent annually

Estimated 2026 AI-related investment-grade issuance: Approximately US$300 billion