Inflation continues to heat up Down Under, strengthening the case for near-term interest rate hikes.
The Australian Bureau of Statistics (ABS) released its latest consumer price index (CPI) for the 12 months ending in December on Wednesday, revealing that both headline CPI and trimmed mean inflation have risen, surpassing market expectations and leading industry players to conclude a near-term interest rate hike is imminent.
Headline CPI rose 3.8% in the 12 months leading up to December 2025, up from 3.4% in November. Meanwhile, the trimmed mean inflation — which measures underlying inflation by stripping out goods with volatile prices changes and what many economists consider a better indicator of inflationary pressures — jumped to 3.4% during the same time period, compared with a 3% increase in the 12 months leading to November 2025.
Rent prices eased slightly to 3.9% in the 12 months to December, down from 4% in November, thanks to stable vacancy rates in most capital cities, the ABS said. Meanwhile, new dwelling prices increased 3% during the same period, up from 2.8% in November, driven by higher prices from project home builders, passing through higher labour and material costs
"In the wake of an interest rate increase, we would anticipate material softening in leading indicators of activity, such as auction clearance rates, consumer sentiment and business conditions [and] confidence," said Adam Boyton, head of Australian economics at ANZ.
The lender is anticipating the RBA will increase rates by 25 basis points at its next meeting, bringing the official cash rate (OCR) to 3.85%.
"That will weaken the activity case for further rate rises beyond the one we expect," he continued. "And while price pressures lifted through the second half of 2025, most top-down inflation indicators continue to suggest that a moderation of inflation back into the target range is likely over 2026 and into 2027."
Over at CBA, the major bank also anticipates a 25 basis point increase in February, citing rising inflation and a tighter labor market as the drivers. The nation's unemployment rate fell to 4.1% in December.
"The accumulation of evidence supports our view that a cash rate hike is needed to ensure inflation returns to the mid‑point of the target band by end 2027," said Belinda Allen, head of Australian economics at CBA. "A rate hike in February should be enough to see inflation settle back close to target by the end of the forecast horizon."
The nation's central bank slashed interest rates three times in 2025, most recently in August, bringing the rate down to 3.6%. But the bank has repeatedly made clear that it would not ease rates further until inflation was back within the central bank's target range of 2% to 3%.
Market players were also dismayed in October when the ABS released its quarterly inflation metrics, showing that inflationary pressures had reached their highest levels since December 2022.
"When the economy is close to full employment and full capacity utilisation, it is hard to know which side of the line it is on. Inflation outcomes are the best guide in this situation," said Luci Ellis, chief economist at Westpac Group. "With trimmed mean as the clearest signal of the underlying inflation trend …. implies that the RBA is likely to raise rates at the February meeting."
The RBA meets next to discuss monetary policy on 2 and 3 of February.
