Australia’s inflation outlook has taken a sharp turn higher, increasing pressure on the Reserve Bank of Australia (RBA) and lifting the risk of the first interest rate hike in more than two years.
Fresh ABS data shows headline inflation jumped to an annual seasonal rate of 3.7%, up from 3.2%, while the trimmed mean – the RBA’s preferred core measure – rose to 3.4%. Both readings remain above the central bank’s 2–3% target band and above the RBA’s most recent guidance, fuelling concerns that prices could stay higher for longer.
The RBA previously forecast trimmed mean inflation would be 3.2% this year. Economists now expect that outlook to be revised when the bank updates its Statement on Monetary Policy next week, with markets closely watching whether the central bank signals a firmer tightening bias.
The hotter core print leaves policymakers facing an increasingly difficult balance: restraining inflation without unnecessarily weakening demand as households absorb elevated housing and living costs.
ANZ flips to a hike call, framing it as “insurance”
The inflation data has already prompted a change in bank forecasts. ANZ became the first major bank to call a move, tipping a 0.25 percentage point rate increase at the RBA’s meeting next week after previously forecasting a hold.
ANZ economist Adam Boyton described the shift as a cautious response to the inflation pulse rather than the start of an extended tightening cycle, saying the bank viewed it as a single “insurance” hike.
Mortgage hit and market reaction: AUD breaks through US70¢
A renewed tightening risk also sharpens the cost-of-living implications. Compare the Market estimates a 0.25 percentage point rise could lift repayments by about $94 a month on a $600,000 mortgage – around $1,128 a year.
Markets moved quickly on the surprise, with the Australian dollar jumping through US70¢ from around US69.96¢, supported by rising local rate expectations alongside a softer US dollar backdrop.
The inflation pulse was led by housing costs, up 5.5% annually. Food was up 3.4%, while recreation and culture rose 4.4%, underscoring that pricing pressure is not confined to a single area of the basket.
The persistence of broad-based inflation is likely to keep the RBA focused on the trimmed mean and services inflation dynamics rather than a short-term dip in any one component.
Analysts: “not if, but when” the RBA tightens
VanEck head of investments and capital markets Russell Chesler said inflation is still moving too slowly back toward the RBA’s target range, arguing the policy question has shifted from possibility to timing.
“Inflation remains uncomfortably higher than the RBA would like… Inflation is not moving decisively in the right direction. With unemployment still low at 4.1%, household spending resilient and property prices continuing to rise, it is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year,” Chesler said.
He noted markets had been leaning toward two hikes in 2026 with a first move around May, but said the latest CPI outcome opens the door to earlier action – potentially as soon as next week.
Chesler pointed to several forces keeping inflation elevated, including electricity costs, slow-to-ease new dwelling construction expenses, global tariffs flowing through supply chains, and sticky services inflation — historically among the hardest categories to bring down.
Labour market signals: hours cut as businesses manage costs
Employment Hero CEO Ben Thompson said the CPI lift “all but takes an interest rate cut off the table” and argued businesses are already responding by adjusting hours rather than headcount.
While wages are up 5.3% year-on-year, Thompson said average hours worked fell 1.5% in December, with casual hours down 6% year-on-year. He said younger workers are feeling the brunt, with hours down more than 6% and wages falling 2% in what is typically a strong seasonal month.
With core inflation running hotter than the RBA anticipated and the currency reacting to tighter-policy expectations, the central bank’s next decision risks becoming less about patience and more about credibility.