Australia Inflation Surprise Revives Rate-Hike Bets, Lifts Aussie Dollar

Australia’s long battle with inflation—once thought to be nearing an end—has been complicated by a fresh rise in prices that is reshaping expectations for interest rates at home and abroad.

Inflation picks up, core measures firm

New figures from the Australian Bureau of Statistics released Wednesday showed consumer prices rose 3.8% over the year to December, up from 3.4% in November and above economists’ forecasts. A key underlying measure watched by the Reserve Bank of Australia (RBA) also moved higher, reinforcing the view that the last phase of disinflation will be difficult.

The bureau said the headline consumer price index rose 3.8% in the 12 months to December, while its new monthly trimmed-mean indicator of underlying inflation was up 3.3% over the year. On a quarterly basis, the trimmed mean—the RBA’s preferred core gauge—increased 0.9% in the December quarter and 3.4% from a year earlier, compared with 3.0% through the year to September.

“The 3.8 per cent annual CPI inflation to December was up from 3.4 per cent to November,” said Michelle Marquardt, the bureau’s head of prices statistics. Trimmed-mean inflation also ticked higher, she added, underlining that “underlying price pressures remain above the levels consistent with the inflation target.”

Most private-sector forecasts had pointed to a smaller rise, with headline inflation closer to 3.6% and quarterly core at around 0.8%. The upside surprise followed a mid-2025 trough, when monthly inflation briefly dipped near 2% and helped justify the RBA’s shift to easier policy.

What’s driving prices higher

The latest increase reflected familiar pressures in housing, utilities and services, alongside a sharp seasonal jump in travel costs.

• Housing rose 5.5% over the year, remaining the largest contributor to inflation.
• Electricity climbed 21.5% after the expiry or scaling back of state-based energy rebates in Queensland and Western Australia, which had temporarily suppressed prices earlier in 2025.
• Rents were 3.9% higher than a year earlier amid tight vacancy rates and limited supply.
• Food and non-alcoholic beverages increased 3.4%, with meat and seafood, fruit and vegetables, and soft drinks rising around 4%.

Recreation and culture prices rose 4.4% annually, a notable acceleration from November. Domestic holiday travel and accommodation jumped around 8% in December and nearly 10% over the year, boosted by school holidays and major events such as the Ashes cricket series. International airfares surged more than 20% in December as airlines charged peak-season prices.

Economists said the pattern underscored a shift from an earlier phase dominated by goods and supply-chain shocks to a period driven more by local services and administered prices.

“This latest print really reinforces the idea that inflation is sticky rather than re-accelerating,” said Devika Shivadekar, an economist at advisory firm RSM Australia. “The big issue for the Reserve Bank is services inflation, which is still running a bit above 4 per cent and proving hard to shift.”

Markets reprice the path of rates

The figures jolted financial markets, pushed the Australian dollar to its highest level in about three years and sharply increased bets that the central bank will raise interest rates as soon as next week, rather than moving toward cuts later this year.

The RBA left the cash rate at 3.6% at its last three meetings after cutting by a total of three-quarters of a percentage point in February, May and August 2025. Officials argued then that inflation was on track to return to target in the second half of 2026 and stressed the importance of supporting a soft landing.

By November, however, the bank had revised its inflation forecasts higher and signaled discomfort with the slow easing in underlying pressures. Governor Michele Bullock warned the board had “not ruled out” further increases if inflation proved more persistent than expected.

Interest-rate futures and overnight index swaps on Wednesday implied roughly a 70% to 75% chance that the RBA will lift the cash rate by 0.25 percentage point at its 2–3 February meeting, up from about 60% before the release. All four major banks—Commonwealth Bank of Australia, National Australia Bank, ANZ and Westpac—are now publicly forecasting a February increase, with several describing it as an “insurance” move rather than the start of a sustained tightening cycle.

“The stronger-than-expected core result probably gets us to a rate hike in February,” said Diana Mousina, deputy chief economist at AMP. “We see it as a one-off rise to reinforce the message that the RBA is serious about getting inflation back into the band.”

Currency and asset-market reaction

The Australian dollar jumped above US70 cents, touching its highest level in around three years before paring gains. Traders cited the inflation surprise, higher domestic rate expectations and a weaker U.S. dollar.

Short-dated bond yields rose as markets priced a higher peak for rates and pushed back the timing of future cuts. Longer-term yields were steadier, with the 10-year government bond near 4.8%, suggesting investors still expect inflation to settle near the RBA’s target over time. The S&P/ASX 200 slipped about a quarter of a percentage point, with real estate and consumer-focused stocks underperforming.

Household squeeze and political fallout

For households, the latest figures mean little immediate relief from cost-of-living pressures and raise the prospect of higher borrowing costs.

Renters and mortgage-holders are among those under the greatest strain. Rents continue to outpace wage growth in many cities, while another rate hike would lift repayments for millions of variable-rate borrowers already hit by steep increases since 2022. Rising power bills and food prices weigh heavily on low- and middle-income households.

Federal Treasury called the increase “unwelcome but unsurprising,” arguing inflation “remains much lower than its peak.” Treasurer Jim Chalmers has attributed recent pressures mainly to energy and housing, while opposition parties say the government has failed to curb living costs.

Wage growth remains modest. The RBA has forecast annual increases in the wage price index around 3%, implying real wages are only just stabilizing after several years of lagging inflation.

Global implications

Australia’s experience is being watched by international investors and central bankers debating how quickly they can begin cutting interest rates after aggressive tightening in 2022 and 2023.

In the United Kingdom, inflation also surprised on the upside in December, rising to 3.4% year over year. In the United States, overall inflation has cooled, but Federal Reserve officials have highlighted persistent services inflation as a reason to move cautiously on cuts.

Australia now sits among advanced economies where inflation has stopped falling and edged higher again—driven largely by stubborn services prices, housing costs and changes to government subsidies. That pattern complicates hopes for a smooth, synchronized global shift to easier monetary policy in 2026.

What comes next for the RBA

The RBA’s next steps will depend on incoming data and how quickly temporary effects—such as the end of electricity rebates and holiday travel spikes—fade from annual comparisons.

Some economists argue an “insurance” hike paired with clear guidance that policy is already restrictive could reinforce credibility without triggering a new tightening cycle. Others warn that once tightening resumes, markets and households may expect more.

For now, the latest inflation report has delivered a clear message: the easy part of bringing prices under control is over. The remaining distance—from roughly 3.5% inflation back to the center of the RBA’s target band—looks likely to be harder, slower and more contested, in Australia and beyond.