Fin-X Rapid Response - January 28th

A rate rise next week is still on the cards after today's Australian CPI figures. However, inflation is still likely to recede in the second half of 2026, even without an increase in the cash rate.

The ABS' Consumer Price Index added +3.8% in the year to December 2025. This was slightly above the consensus forecast of +3.6% yoy, according to the Bloomberg poll.

The +3.8 yoy increase was up from a +3.4% rise in the year through to November and matched the recent high recorded in October.

Trimmed mean inflation was +3.3% in the year to December 2025, up from +3.2% yoy a month earlier.

In December, headline CPI rose +1.0% in original terms and +0.2% in seasonally adjusted terms.

Over the fourth quarter of 2025, headline CPI rose by +0.6% and the trimmed mean measure by +0.9%.

The largest contributors to annual inflation over the past 12 months were Housing (+5.5%), Food and non-alcoholic beverages (+3.4%), and Recreation and culture (+4.4%).

Annual Goods inflation was +3.4% yoy in December, up from +3.3% yoy in November. The main reason for stronger Goods inflation in December was Electricity, which rose by +21.5% in the 12 months to December. The annual rise in electricity costs is primarily related to State Government electricity rebates being used up by households. This is up from a +19.7% yoy increase to November 2025, reflecting the timing of when households received payments of the State Government and Commonwealth Energy Bill Relief Fund (EBRF) rebates in 2024. Excluding the impact of the Commonwealth and State Government electricity rebates over the previous year, electricity prices rose +4.6% in the 12 months to December. This was unchanged from the 12 months to November and reflects annual price reviews from energy retailers in July 2025. 

Annual Services inflation was +4.1% in the year to December, up from +3.6% yoy in November.

Annual Services inflation rose due to Domestic holiday travel and accommodation (+9.6%), and Rents (+3.9%).

In monthly terms, prices for Domestic holiday travel and accommodation rose by +8.2% due to strong demand in the lead up to Christmas, the summer school holidays and major events such as the Ashes cricket test series. 

S&P/ASX200 8,915 -0.3%, AUDUSD 0.6993 -0.3%, Aus 2yr 4.22% -1bp, Aus 10yr 4.83% -1bp

Fin-X Wealth View

The December CPI data was above forecasts, and the market has moved to price a 70% chance of a rate rise next week to 3.85%. The total number of expected rate rises has also moved to 2.3, bringing the market-implied year-end cash rate to +4.18%.

A rate is marginally more likely, based on the way that these figures will feed into the quarterly SMP model projections. However, the Board arguably doesn't need to act.

The vast majority of the increase stems from electricity prices - which are not rate-sensitive and squeeze household budgets in the same way as rate hikes - and rents, which tend to rise further following increases in the cash rate due to higher mortgage costs.

In addition, the rise in services inflation likely reflects temporary factors such as the Ashes, and typical lagged responses to goods price increases.

Moreover, the unemployment figures are likely overstating tightness in the labour market as employment growth is below the population increase over the last year.

Whether the RBA raises rates next week or not, inflationary pressures seem very likely to abate later in the year. We see any upward pressure on yields as likely to be temporary.

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