Hotter-than-expected December CPI tips odds towards Feb rate hike

Core inflation rose 3.3 per cent in the 12 months to the December 2025 quarter, exceeding the RBA’s forecast of 3.2 per cent and cementing economists’ concerns that price pressures may persist longer than expected.

Headline CPI increased by 3.8 per cent over the year to December 2025, data from the Australian Bureau of Statistics (ABS) revealed on Wednesday (28 January).

Anders Magnusson, chief economist at BDO, said the quarterly inflation reading had reinforced the message that underlying price pressures were proving more stubborn than expected.

“With inflation now overshooting the Bank’s forecast for two consecutive quarters, the likelihood of a rate hike has increased substantially. Markets were already pricing a significant chance of tightening, and today’s result will only strengthen that expectation,” Magnusson said.

“Further, the tight labour market provides the RBA with ample room to act. With unemployment still low and the economy operating close to capacity, the risk that higher interest rates could jeopardise full employment is diminished.”

Speaking to ABC News earlier this month, RBA deputy governor Andrew Hauser essentially ruled out the prospect of near-term rate cuts, and said the RBA would pay close attention to the December quarter inflation print to inform its next rate decision.

“[CPI] ticked down [in November]. That was helpful. But it was largely as we had expected, and we, as you know, will be waiting for the quarterly inflation in about two or three weeks time before we take a view on where we think inflation is today,” Hauser said.

“But inflation above 3 per cent, let’s be clear, is too high. We’re charged to keep inflation between 2 to 3 per cent and it’s currently above that.”

The central bank was also concerned about capacity constraints in the economy, meaning there could be limited scope to boost production without spurring additional inflation.

“Firms are operating at reasonably high capacity. That’s a good thing. It means that there aren’t loads of spare resources, people out of work, lying around,” Hauser said.

“But it does also mean that there may be less scope to expand production without inflation also picking up. If that were to be the scenario behind the pickup in inflation, that actually we’re bumping against the bumpers, we could be seeking a less optimistic profile from interest rates.”

The December quarter uptick in inflation was primarily driven by housing (5.5 per cent), food and non-alcoholic beverages (3.4 per cent) and recreation and culture (4.4 per cent).

Housing inflation was primarily driven by electricity prices, which rose by 21.5 per cent over the 12 months to December. This was largely due to the wind-up of state electricity rebates, the ABS noted; excluding the rebates, electricity prices rose by 4.6 per cent.

BDO’s Magnusson noted that a rate hike next week would signal a “meaningful shift” in the monetary policy cycle, given the RBA’s cautious approach to policy setting

“It’s important to note that the RBA does not shift into a tightening cycle lightly.”

“If the Bank does move to raise rates next week, it would signal that it sees long-term inflation dynamics emerging, not just a temporary overshoot. That would mark a meaningful shift in the monetary policy cycle.”