Inflation Soars in December, Prompting Early Rate Hike Concerns
New data from the Australian Bureau of Statistics (ABS) reveals persistent price pressures, with analysts warning that rate hikes could come sooner than expected. Australia's Consumer Price Index (CPI) surged by 3.8% in the 12 months leading up to December 2025, according to the latest ABS figures.
ABS head of prices statistics, Michelle Marquardt, noted, "The 3.8% annual CPI inflation to December represents a rise from 3.4% in November."
Housing emerged as the primary contributor to annual inflation in December, soaring by 5.5%. This was followed by food and non-alcoholic beverages, which increased by 3.4%, and recreation and culture, up by 4.4%.
Marquardt added, "Trimmed mean inflation stood at 3.3% in the 12 months to December 2025, a slight increase from 3.2% in the previous 12 months."
Annual goods inflation rose to 3.4% in the 12 months to December, driven primarily by a 21.5% surge in electricity prices over the year. Services inflation also increased to 4.1% in the 12 months to December, with domestic holiday travel and accommodation costs rising by 9.6% and rents by 3.9%.
Annual housing inflation reached 5.5% in December, fueled by a 21.5% increase in electricity costs over the year, as households utilized state government electricity rebates in Queensland and Western Australia.
Excluding the impact of government rebates, electricity prices rose by 4.6% in the 12 months to December, unchanged from November, reflecting annual price reviews by energy retailers in July 2025.
The quarterly CPI movement stood at 0.6% in the December quarter of 2025, while the trimmed mean (based on pre-October 2025 data) rose by 0.9% over the quarter.
VanEck's head of investments and capital markets, Russell Chesler, emphasized that inflation remains above the Reserve Bank of Australia's (RBA) target band and is not decreasing decisively. He stated, "Inflation remains uncomfortably high for the RBA's preferences, and despite a slight pull-back to 3.4%, we are well beyond the RBA's 2-3% target band."
Chesler further noted, "Year-on-year inflation stands at 3.8%, and the trimmed mean has increased to 3.3%. Inflation is not moving in the desired direction."
With low unemployment at 4.1%, resilient household spending, and rising property prices, Chesler predicted that the RBA will soon raise interest rates, with two hikes expected this year, starting in May. He warned, "Markets have predicted two rate hikes this year, but the latest CPI data could prompt the central bank to lift rates next week, on February 3rd."
Chesler highlighted several factors contributing to upward price pressure, including elevated electricity costs, slow-to-decline new dwelling construction costs, and higher global tariffs impacting supply chains and consumer prices. He also noted the stickiness of services inflation, historically challenging to control.
However, Chesler acknowledged the inflation backdrop as "supportive" for the Aussie dollar. He explained, "Tightening monetary policy expectations, coupled with a weaker US dollar and robust commodity prices, have bolstered the AUD, which is now trading above the US 70-cent level, last seen in February 2023."
David Bassanese, Betashares' chief economist, echoed concerns about elevated trimmed mean inflation in the December quarter, rising only slightly to 0.9%. He attributed this to ongoing demand-driven price pressures, with new home purchase costs accelerating due to strong demand and higher labor and material expenses. Bassanese also noted the resilience of rental inflation.
Holiday and travel costs surged due to strong seasonal demand around Christmas, school holidays, and major events, which Bassanese partially attributed to one-off factors. However, he emphasized the difficulty for the Reserve Bank to ignore these pressures amid broader price increases. Bassanese concluded, "All signs point to a rate hike at the February policy meeting. My base case predicts a 0.25% rate increase, raising the cash rate to 3.85%."
Additionally, Bassanese suggested that if the March quarter 2026 CPI report remains strong, with a trimmed mean quarterly inflation of 0.8% or higher, the RBA might raise rates again in May. He emphasized the need for two rate hikes to dampen economic growth and rein in inflation pressures in sectors like housing, travel, and hospitality.
