Headline inflation has jumped again, reinforcing expectations that the Reserve Bank of Australia (RBA) may be at – or past – the end of its interest rate cutting cycle, with some economists now warning the next move in rates could be up.
New monthly data from the Australian Bureau of Statistics (ABS) show headline inflation rose to 3.8% in the year to October, above economists’ expectations of 3.6%. The RBA’s preferred underlying measure, trimmed mean inflation, also surprised to the upside, lifting to 3.3% over the year. Both figures sit above the central bank’s latest forecasts, which were already revised higher earlier this month, when the RBA projected underlying inflation of 3.2% for the December quarter.
The October print is the first full monthly inflation release from the ABS, after earlier partial monthly series only covered around two-thirds of the consumer price basket.
The RBA has welcomed the new data, saying it brings Australia “in line with international best practice”, but governor Michele Bullock has cautioned that the series will be volatile and carry “a few seasonal problems”.
For now, the central bank says it will continue to put more weight on the quarterly inflation figures, but will consider the monthly readings alongside them. “As we learn more about the data, the RBA may choose to focus on a measure of trimmed mean inflation that is calculated from the complete monthly [consumer price index],” it has said.
Inflation above the target band
Even on the RBA’s preferred underlying basis, inflation at 3.3% remains above the 2–3% target band, and comes after underlying inflation for the September quarter surprised by rising to 3%, the top of that band. The combination of the latest inflation uptick and a fall in the unemployment rate to 4.3% in October has largely extinguished hopes of further rate cuts, with markets no longer pricing in any easing in 2026.
Electricity and housing costs did much of the damage. The RBA had already flagged a lift in headline inflation in the second half of 2025 as state energy rebates rolled off. Electricity prices rose 37.1% in the year to October, up from 33.9% in September, while housing prices climbed 5.9% over the year. Food and recreation both rose 3.2%.
What the experts say
Krishna Bhimavarapu, APAC economist at State Street Investment Management, said the upside surprise was being driven heavily by power bills and stubborn housing costs. “October CPI surprised on the upside, with electricity prices once again doing the heavy lifting as the timing of household rebate usage continued to distort the picture. Adding to concerns, rents came in firmer than expected. Instead of the anticipated sequential decline, prices held flat—an outcome that underscores persistent inflationary pressures.
“Today’s data reinforces expectations that the RBA will maintain its extended hold. However, the sharp downside surprise in Q3 construction work done could weigh on GDP growth, introducing a counterpoint to the inflation narrative, unless residential activity is an upswing which could negate the impact of the drag from engineering work done.”
From a markets perspective, State Street’s Head of APAC Macro Strategy, Dwyfor Evans, said the inflation surprise would harden the RBA’s cautious stance and support the Australian dollar. “The Australian October CPI report beat forecasts on both headline and trimmed mean as the continued strong price backdrop evidenced in the State Street PriceStats series challenges the Reserve Bank’s monetary policy stance. In all likelihood, the RBA will take this release as further evidence of price pressures in the economy that do not lend to easier policy and suggests a cautious approach to rates for the foreseeable future. This is a stance increasingly consistent with market pricing in the OIS with only modest cuts priced in over the next six months; this should continue to provide support for the AUD with real money investors already overweight the currency.”
VanEck Head of Investments & Capital Markets, Russel Chesler, said the October data show inflation has effectively stalled in its descent and is now back near year-ago levels, driven by sticky services, housing and electricity prices. “Inflation picked up in October, following the trend of rising inflation in the back half of this year. With headline inflation at 3.8%, which is higher than the market expectation of 3.6%, and underlying inflation (measured by the trimmed mean) at 3.3% (up from 3.2% in September), inflation is effectively back where it was a year ago. In its latest Statement on Monetary Policy this month, the RBA revised its inflation outlook, advising that elevated inflation (above 3%) was likely to remain for much of 2026, before returning to slightly above midpoint of the 2-3% target range by late 2027.
“There are several factors influencing the trajectory of inflation in Australia. Some of the ‘disinflationary gains’ from previous years, such as falling goods prices and government subsidies, have fallen off, while the ‘sticky’ components – namely services, housing, and electricity prices – have continued to rise. Services inflation is perhaps the main thorn in the RBA’s side, as this spans across a large portion of the CPI basket. Services inflation has been difficult to conquer given the persistently strong wage growth and tight labour market. Housing inflation has also accelerated, with rising property values and record-low vacancy rates driving rental prices up by almost 44% compared to five years ago, according to Cotality’s Quarterly Rental Review. Electricity costs have continued to push up, going from a 33.9% annual increase in September to a 37.1% annual increase in October. This has primarily been due to government energy rebates rolling off across state and federal.
“Rising inflation is certainly something to keep an eye on, particularly given the RBA’s revised projections of an elevated inflation environment throughout 2026. However, barring a sharp spike in either inflation or unemployment – neither of which we have seen in recent years – we think it will continue to be business as usual for Australians. What we’ve recently seen throughout the ‘higher for longer’ tightening cycle and cost-of-living crisis is that the Australian economy is remarkably resilient,” Chesler said.