Housing was Australia's chronic inflation issue, AMP economists My Bui and Diana Mousina said on Wednesday.
The Australian Bureau of Statistics' latest consumer price figures showed headline inflation exceeded forecasts at 3.5 per cent in the year to July.
Despite only making up 21 per cent of the CPI basket, housing accounted for nearly one-third of annual inflation.
"We think new dwelling purchases need to come down to at least 0.25 per cent month-on-month for the Reserve Bank to be comfortable, as this is a very cyclical category that can quickly show any progress in inflation," Ms Bui and Ms Mousina said.
Given the outsized influence of construction costs on inflation, the sector has been singled out by RBA governor Michele Bullock as one area where cost pressures were flowing through from the Middle East to consumers.
"Producer prices are rising for the things you'd expect and we are seeing it come through in things like building costs," she told reporters after the RBA's last board meeting in August.
"The building industry is one where they're trying to pass it on. Others are wondering whether or not demand is strong enough for them to pass it on, because it all depends on whether consumers will actually choose to pay if prices go further.
"So that push and pull between whether or not it comes into the producer prices and ultimately gets passed on to the consumers, that's what we're going to have to be watching."
The 2.1 per cent rise in house construction input costs in the June quarter was the largest quarterly increase since 2022, JP Morgan analyst Tom Ryan said.
"Given the inherent lags in the construction sector and the current dwelling construction pipeline remaining substantial for now, we expect relatively elevated building cost pass-through to persist in the very near term," he said.
But cost pressures remain below the 2021/22 inflation break-out, and the slowdown in the established housing market should cap capacity use in the construction sector and limit how much builders can pass on costs, Mr Ryan said.
HSBC chief economist Paul Bloxham said as well as next week's June quarter GDP print, the ongoing housing market slump would be the next focus.
He expects the RBA to be concerned that inflation is too high, but that it will be mindful that weak growth and falling house prices will put downward pressure on inflation.
At 3.6 per cent, the trimmed mean could still be too high for the RBA to tolerate in the September quarter, but it is too early to tell, given statistical issues with the monthly July quarter, Mr Bloxham said.
"In addition, a weak GDP print next week or a sharper than expected decline in housing prices are also expected to play a role in whether the RBA lifts rates further," he said.
With Cotality's next gauge of home values due out next week, another steeper-than-expected fall in prices could tip the RBA back away from another hike.
While Ms Bullock has consistently reminded reporters that the bank does not target house prices, a deep downturn could dent demand and do part of the RBA's job.
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