Shock inflation rise means rate hike now a near-certainty

Inflation has reignited and borrowers look set to be the scapegoat as the Reserve Bank of Australia (RBA) will look to pour cold water on consumer spending.

Despite a cost of living crisis, Australians have still managed to push core inflation well beyond market expectations to 3.8 per cent to the end of December, up from 3.4 per cent just a month prior.

On a month-on-month basis, inflation topped 1 per cent against market expectations of 0.7 per cent.

There is now a strong likelihood the RBA will lift interest rates when it meets next Tuesday (3 February).

Adding to households’ woes, it is housing costs that are fanning the flames of the inflation fire the most vociferously.

Housing was up 5.5 per cent, followed by food and non-alcoholic beverages, up 3.4 per cent, and recreation and culture, which rose 4.4 per cent.

If there was any faint glimmer of hope that the RBA would hold off a little longer, it rested on the trimmed mean inflation figure being a little less inflammatory.

Trimmed mean inflation, the RBA’s preferred measure of the price rises, was 3.3 per cent in the 12 months to December 2025, up from 3.2 per cent in the 12 months to November 2025.

The RBA may also factor in the impact of expiring electricity subsidies, which has contributed to the rapid rise of inflation. The central bank’s goal is to keep inflation within a 2 to 3 per cent target range.

Michelle Marquardt, ABS’ Head of Prices Statistics, said electricity rose 21.5 per cent in the 12 months to December.

“The increase in electricity costs mostly related to state government electricity rebates in Queensland and Western Australia being used up by households. 

“This was up from a 19.7 per cent rise in the 12 months to November.

“Excluding the impact of the Commonwealth and State Government electricity rebates over the previous year, electricity prices rose 4.6 per cent in the 12 months to December, which was unchanged from the 12 months to November and reflects annual price reviews from energy retailers in July 2025.”

Currency markets were seemingly expecting a rate hike Tuesday, with the Australian dollar breaching the US70 cent barrier upon release of the ABS data. It last reached that point two years ago almost to the day.

Banks already lifting rates

The country’s biggest banks will not be overly surprised by a February rate hike from 3.6 to 3.8 per cent. They are already lifting their fixed rates in anticipation of RBA hikes in 2026.

Westpac and ANZ revised their cash rate forecasts on the back of Wednesday’s (28 January) inflation data. Both now expect a 0.25 percentage point rate hike next week, joining CBA and NAB. NAB is the only one out of the big bank economic teams predicting a second hike in May.

Sally Tindall, Canstar.com.au’s Data Insights Director, said that based on the new inflation data, “you’d have to think a cash rate hike next week is close to a done deal”. 

“Banks continued to march their fixed rates north this week, with six more lenders hiking an eyewatering 176 rates in the space of seven days,” Ms Tindall said.

“Rates under 5 per cent are now officially on borrowed time with just 10 lenders offering at least one rate in the ‘4s’.”

Canstar data shows there are currently over 40 lenders offering at least one variable rate under 5.25 per cent, however, one hike could see the goal posts shift this to the mid-5’s.

“We’re now four long years into the battle with inflation; the RBA no longer has oodles of time on its side,” Ms Tindall said.

“If it doesn’t act now, it’s another three more months before the next quarterly figures – still its preferred dataset for now – which could be seen as too long a wait given the context.

“If you’ve got a mortgage, it’s time to start preparing.”

Treasurer pins hope on inflation rise being temporary

No government likes to preside over rising inflation that upsets an electorate and Federal Treasurer Jim Chalmers is no exception.

Having enjoyed last year’s falling interest rate environment and claiming his share of credit for it, he was on Wednesday pinning his hopes on a quick turnaround.

He put the rising inflation figures down to “a mix of very temporary factors”, including the scrapping of the energy bill rebates.

“In the data today, the timing of these payments combined with the ending of the state rebates at the same time is driving some of the temporary part of this inflation challenge,” he said.

“We expected this because of a combination of those temporary factors and some of those persistent pressures, and so we still expect inflation to moderate over time.”

He stressed that the inflation burst was due to private sector spending and not public money.

“We acknowledge that these price pressures are hanging around longer than we’d like, and that today’s numbers are higher than we’d like, even though they’re much lower than what we inherited.

“So I take responsibility for doing my job to address this inflation challenge in our economy, to address the productivity challenge in our economy, and also to do what we can to make our economy more resilient in the face of all of this global economic uncertainty.”