For most Australian households, 2025 has felt like yet another year of “doing more with less”. Power bills are only bearable because of government rebates, the weekly grocery shop still stings, rents are at record highs, and anyone with a mortgage is watching every Reserve Bank meeting like a season finale.

As the year closes, the big question is whether genuine relief is finally on the way – or whether the cost-of-living squeeze is now the “new normal”.

Where prices are still biting

The latest numbers from the Australian Bureau of Statistics show inflation running at 3.8% in the 12 months to October 2025, up from 3.6% a month earlier. Housing costs are the biggest driver, up 5.9% over the year, with food and non-alcoholic beverages and recreation also adding to the pressure. Australian Bureau of Statistics

Underlying (trimmed mean) inflation – the RBA’s preferred measure – is still above the 2–3% target band at about 3.3%, and trending slightly higher, a sign that price pressures are proving sticky rather than fading away.

Behind those averages are a few day-to-day pain points:

• Housing and rent: Years of under-building, high migration, and investors competing with first-home buyers have kept rents elevated and vacancy rates low, especially in Sydney, Melbourne and Brisbane.

• Power bills: Electricity prices spiked sharply after the global energy shock and the closure of ageing coal plants. Rebates have disguised some of the increases, but the underlying cost of energy and network upgrades remains high.

• Food and groceries: While the worst of the supermarket price surge has eased, meat, dairy and some fresh produce remain significantly more expensive than pre-COVID levels, partly due to weather events and strong export demand.

• Services: Everything from insurance and childcare to car servicing and haircuts has crept up in price, reflecting higher wages, insurance costs and commercial rents.

For many families, these are not abstract numbers. Credit card balances have climbed to a four-year high of about $18.3 billion, suggesting more households are leaning on plastic to cover everyday expenses. The Guardian

Interest rates: the other side of the squeeze

After a rapid run-up in 2022–23, the Reserve Bank’s cash rate is sitting at 3.6%, and markets expect it to stay on hold at the final meeting of 2025.

That’s a far cry from the near-zero rates of the pandemic era. For an average mortgage in Sydney or Melbourne, the jump in repayments has been the single biggest hit to the household budget over the last three years. Even though rate rises have paused, two uncomfortable realities remain:

• Relief has not yet arrived: Most borrowers are still paying hundreds (sometimes more than a thousand) dollars a month extra compared with 2021–22.

• Rate hikes in 2026 are still on the table: With inflation proving stubborn, economists are increasingly debating whether the RBA may need to lift rates again next year if price pressures don’t moderate.

In other words, we are no longer in crisis mode – but we are not out of the woods.

Government relief so far – and what’s changing

Both federal and state governments have thrown a lot at the cost-of-living crisis:

• Energy bill relief: Through the Energy Bill Relief Fund, most households and eligible small businesses are receiving up to $150 in rebates from 1 July 2025 to the end of the year, delivered in two $75 credits on their power bills.

• Tax cuts: A redesigned tax cut package has taken effect for all taxpayers, shifting the benefits towards low- and middle-income earners to soften bracket creep and support those most exposed to rising prices.

• Rent assistance, HECS and welfare tweaks: Increases to Commonwealth Rent Assistance, changes to the indexation of student debt, and boosts to some income support payments were framed as targeted relief for those under the greatest strain.

• Cheaper healthcare and education: Measures like stronger Medicare funding, cheaper scripts through the Pharmaceutical Benefits Scheme and expanded free TAFE have been pitched as structural ways to reduce unavoidable costs over time.

However, a major shift is now underway.

The government has confirmed that the extended energy bill rebates – worth nearly $7 billion over 18 months – will not continue beyond the end of 2025 and will not be repeated in 2026, as Canberra moves towards tighter budgets and more “fiscally responsible” settings.

Economists have warned that while ending rebates may help the budget and reduce inflationary pressure in the long run, it will also expose households to the true cost of electricity, adding back up to 0.4 percentage points to inflation as subsidised prices unwind.

Why it still feels like we’re going backwards

Even as inflation comes down from its peak, many Australians feel worse off. One key reason: wages haven’t kept pace.

Analysts estimate that, once you adjust for inflation, average real wages may not fully recover their pre-COVID purchasing power until around 2032 if current trends continue.

So even if the rate of price increases slows, the level of prices is now permanently higher – and incomes are chasing a moving target. Add rising tax brackets, higher mortgage repayments and steep rents, and it is easy to see why the “vibe” of the economy feels grim, despite better headline numbers than a year or two ago.

Who’s hurting most?

Not all households are affected equally. Some broad patterns have emerged:

• Renters and younger households are copping the worst of rent rises and have less buffer against higher food and energy costs.

• Low-income workers have limited discretionary spending to cut back and are more likely to be juggling multiple jobs or gig work to stay afloat.

• Families with mortgages and kids are squeezed between school costs, housing repayments, and rising health and insurance bills.

• Small businesses, particularly in hospitality and retail, face higher input costs (energy, wages, rent) at the same time as consumers pull back on discretionary spending.

These groups are also the most sensitive to any further moves in interest rates or sudden removal of temporary government supports.

What genuine relief might look like

Over the next few years, cost-of-living pressure will be shaped by three big forces: inflation, interest rates and incomes. The best-case – and still plausible – scenario is:

1. Inflation gradually moves back into the RBA’s 2–3% target band and stays there.

2. Real wages (after inflation) begin to grow, even modestly.

3. Interest rates can eventually be cut once the RBA is confident that inflation is under control.

Here’s where relief could realistically come from.

1. Tax cuts and indexation

The new income-tax schedule – with further cuts legislated for 2026 and 2027 – will provide some additional “take-home pay” relief, particularly for low- and middle-income workers.

If governments also continue to index welfare payments, rent assistance and thresholds for family benefits at or above inflation, the safety net can stop falling further behind the cost of essentials.

2. Housing supply, not just subsidies

The only long-term way to tame rent and house-price pressures is to build more dwellings where people actually want to live. That means speeding up planning approvals, investing in infrastructure in new growth areas, and encouraging a mix of private, social and build-to-rent projects.

Recent federal-state housing agreements and incentives are a step in that direction, but they will take years to show up in lower rents. In the short term, renters are likely to remain under pressure even if inflation moderates.

3. Cheaper, more reliable energy – without gimmicks

Subsidies have temporarily masked the true cost of electricity. The real structural relief will only arrive if wholesale power prices fall and stay low, which requires:

• Faster investment in renewables and firming (like batteries and pumped hydro)

• Clearer market rules so investors can commit capital

• Upgrades to transmission lines that connect new generation to the grid

Economists from across the spectrum argue that Australia has spent billions trying to blunt high energy bills with rebates rather than tackling the underlying problem of supply and reliability.

If policy can unlock cheaper, more stable electricity over the next decade, that will flow through to household bills and business costs alike.

4. Productivity and competition

Ultimately, living standards rise when the economy becomes more productive – that is, when we can create more value with the same amount of labour and capital. The RBA has pointed out that productivity growth has been sluggish, oscillating around zero in recent quarters.

Better productivity can come from:

• Investment in technology and digital infrastructure

• Skills and training (including free TAFE and lifelong learning)

• Regulatory and planning reforms that reduce red tape

• Stronger competition policy to stop a handful of big players dominating key markets (like groceries, banking and energy)

If productivity improves, businesses can afford to pay higher wages without simply passing the cost on to consumers – the only sustainable way to lift real incomes.

5. Smarter, more targeted support

The recent debate over universal energy rebates versus targeted assistance highlights a deeper shift: governments are under pressure to focus support on those who need it most, rather than announcing broad schemes that splash cash but do little for the most vulnerable.

Future relief is likely to be:

• More narrowly targeted (low-income households, renters, people on income support)

• Delivered through the tax system or social security (e.g. increased thresholds, supplements)

• Less reliant on across-the-board price subsidies that can actually fuel inflation

What households should realistically expect

So what does all this mean for an ordinary Australian household looking ahead to 2026 and beyond?

• The next year will still feel tight. Inflation is lower than its peak but not yet “comfortable”, and some support – like power rebates – is being withdrawn. Mortgage rates are unlikely to fall quickly, and may even edge higher if inflation re-accelerates.

• Structural relief is coming – slowly. Tax cuts, cheaper healthcare measures, and moves to expand housing supply are real, but their full effect will roll out over several years rather than months.

• The balance of power is shifting from short-term cash handouts to longer-term reforms. That may be sensible economics, but it is a tough sell for people who simply need their weekly budget to add up.

For now, households are likely to keep doing what they’ve done for the last two years: shopping around on mortgages and power, cutting back on discretionary spending, and dipping into savings or credit when there’s no slack left.

The political stakes are high. Cost of living will remain the defining issue in Australian politics in 2026. Voters will be looking not just for another round of rebates, but for convincing plans to fix the underlying drivers of high prices – housing, energy, childcare, healthcare and wages.

Whether that relief arrives before households lose patience is a question that will shape not just family budgets, but the next federal election.