Australia's consumer price index held steady at 3.8% annually in January, defying expectations of a modest easing and keeping the pressure firmly on the Reserve Bank of Australia (RBA) to act again on interest rates.
The Australian Bureau of Statistics (ABS) data showed monthly headline CPI slowed to 0.4% from 1% previously, but the trimmed mean — the central bank's preferred core measure — edged higher to 3.4% annually, catching markets off guard. The Australian dollar gained 0.2% to US70.71¢ following the release.
The result leaves inflation well clear of the RBA's 2 to 3%t target band, and comes just weeks after the bank lifted the cash rate to 3.85% in response to an acceleration in price pressures late last year. Bond markets are now pricing roughly a 70% probability of a further hike at the May policy meeting.
Housing remains the chief culprit, with costs surging 6.8% over the year as electricity prices jumped 32.2%— largely reflecting households exhausting Commonwealth and state government energy rebates. Food and recreation costs also contributed meaningfully to the upside surprise.
Analysts are divided on what comes next. BNY Mellon's APAC macro strategist Wee Khoon Chong sees the RBA turning more hawkish than markets currently anticipate, arguing that a tight labour market and elevated wage growth create conditions for rates to overshoot current expectations — a dynamic he believes favours further Australian dollar strength. Global X's Marc Jocum shares that concern, noting that underlying inflation appears to be re-accelerating rather than fading, with cost pressures entrenched across housing, food and leisure.
VanEck's Cameron McCormack takes a more measured view, suggesting the board is likely to pause in the near term and assess incoming data before committing to another move, noting that much of the rate risk is already priced into markets.
All eyes now turn to RBA Governor Michele Bullock, who is scheduled to speak in Melbourne Wednesday evening. Her remarks will be closely parsed for any shift in the bank's tolerance for inflation that has now remained above target for an extended stretch — and whether May shapes up as a live meeting or merely a warning shot.