Inflation horror show means fifth 2026 rate rise almost inevitable
Borrowers have been spooked by a scary lift in inflation that has made an interest rate hike on Melbourne Cup Day a near certainty.
The prospects of an imminent interest rate rise now appear almost certain, after inflation data released Wednesday (28 October) erred on the upside.
Financial markets are now pricing in an 85 per cent chance of the Reserve Bank of Australia (RBA) lifting the official cash rate next Tuesday (3 November).
The Consumer Price Index (CPI) rose 4.3 per cent, up from 4.0 per cent in the 12 months to August 2026.
Before the Australian Bureau of Statistics (ABS) figures were released, money markets had the likelihood of a rate rise at 69 per cent.
Borrowers again look set to carry the burden of trying to tame inflation that is largely driven by housing and fuel costs, measures that are widely regarded as being impervious to rate hikes.
Rachael McCririck, ABS Head of Price Statistics, said housing was the largest contributor to annual inflation in September, rising by 5.2 per cent.
“Annual inflation of 5.2 per cent for housing reflected rising costs for both new dwellings and electricity; new dwelling prices rose 4.7 per cent in the 12 months to September as builders passed on higher costs for materials and labour, which was down from 5.4 per cent in the 12 months to August.”
Transport was the second largest contributor to annual inflation in September, rising by 8.7 per cent, due to higher automotive fuel prices.
“On a monthly basis, automotive fuel prices rose 9.4 per cent in September, compared to a rise of 14.8 per cent in August, driven by higher world oil prices,” Ms McCririck said.
The glimmer of hope that remains for mortgagees is that trimmed mean inflation, the measure watched most closely by the RBA, was markedly lower than the CPI figure at just 3.6 per cent, from a revised 3.5 per cent in the 12 months to August 2026.
When prices for some items change significantly, measures like the trimmed mean can give more insights into how underlying inflation is trending without the impact of temporary shocks. In September, automotive fuel was excluded from the trimmed mean and this was a key driver of the difference between headline and trimmed mean inflation.
As the Middle East conflict drives up the cost of living, the RBA is left with a single tool at its disposal as it tries to suppress inflation.
Increasingly, however, observers of the economy are coming to the conclusion that slamming higher mortgage repayment burdens on a relatively small part of the populace is doing nothing to dent inflation.
David Koch, Economic Director, Compare the Market, was among those who questioned whether rate rises were the best way to go about tackling the problem, arguing a broader response was needed.
“The problem is inflation is stuck despite four rate rises this year.
“It’s not slowing despite the financial pain inflicted on average Australian households but the challenge is what can we do to break the impasse? Rate rises haven’t worked so far.
“Should homeowners be the ones to carry the full burden? Right now, it’s the only lever the RBA has, but I think governments at all levels need to start picking up the slack.”
Marc Jocum, Senior Investment Strategist at Global X said, “This is an ugly number for the RBA and significantly strengthens the case for another rate hike next week.”
Betashares Chief Economist, David Bassanese, said he expected the RBA to deliver a Melbourne Cup Day rate hike next week but then leave them on hold in December.
“The only argument against a rate hike next week is the fact the RBA pre-emptively raised rates in September, so may feel it has a little more time to assess economic developments and possibly revisit the rate hike decision in December,” he said.
Political blame game
The debate on how inflation should be tackled has become a major source of political conflict.
The Opposition has lambasted the government for what it says has been profligate federal government spending.
Predictably, the government puts the blame elsewhere.
The Treasurer, Jim Chalmers, on Wednesday put his faith in what appears an unlikely outcome.
“The most important thing that can happen for Australians under pressure is to see an end to this war in the Middle East,” Mr Chalmers said.
“This war in the Middle East has been disastrous for Australians, for cost of living and for inflation, right around the world.”
He added that while “we accept our part in the fight against inflation”, high oil prices and a recovering private sector were the main contributors to the inflation spike.
The government has ruled out renewing fuel subsidies for consumers.
RBA Governor Michele Bullock took a rare, if tentative step, into the political fray soon after the inflation data was issued.
“Government spending – federal and state, I have to say here, not just federal – all contributes to aggregate demand in some way, whether it be through infrastructure projects, services they have to provide, and so on,” Bullock said.
“And to the extent that aggregate demand is above aggregate supply, it contributes to that excess demand.
“Now, as I have also said repeatedly, monetary policy is independent, and fiscal policy is a matter for the parliament and the government. It is not for the central bank to tell the government what to do with their spending, and particularly, how to direct their spending.”
Mortgage holders with an average loan of around $731,000 are already spending $464 more a month on repayments following the four 0.25 per cent hikes that have occurred this year.
A fifth 0.25 percentage point rate hike would add another $114 to monthly repayments, bringing the cumulative monthly increase to $578 - that’s nearly $7,000 more over the course of a year.
