Inflation jump locks in RBA to start rate hikes from next week

Another high inflation reading has ramped up pressure on the Reserve Bank to lift rates again next week, putting borrowers on notice.

The Consumer Price Index (CPI) rose 3.8% in the 12 months to December, a strong rise on the 3.4% recorded in November.

The uptick was above market expectations of 3.6% and puts inflation back to where it was in October.

While the high reading is tied to expected spending throughout the lead up to Christmas and over the summer holidays, some of the biggest contributors to inflation were essential services, such as electricity costs. 

The jump will likely be enough for the RBA to kick off a tightening cycle as soon as next week, market pricing suggests.

The RBA board will meet next week for the first time this year. A rate hike would mark the first increase for Aussies in more than two years.

A closer look

RBA governor Michele Bullock had warned late last year that bank is expecting higher headline inflation numbers through until mid-2026, largely tied to the run off of electricity rebates across the country.

While this is of concern to borrowers, the bank also focusses on underlying inflation when making its decisions on interest rates, known as the trimmed mean.

That all important figure is calculated by "trimming" away the most volatile items CPI considers, those with the largest price changes such as electricity, in order to get a more realistic picture of the underlying inflation trend. 

The trimmed mean inflation figure came in at 3.3% for the 12 months to December, up from 3.2% in November. While less volatile than the headline figure, trimmed mean inflation is also considered more 'sticky', meaning it can take longer to move in either direction.

Both headline and trimmed mean inflation is now firmly outside the RBA’s 2-3% target range, leaving the RBA little choice but to act to reign it in, according to a growing number of economists.

What caused CPI to rise?

This latest Australian Bureau of Statistics CPI data shows housing (+5.5%), and food and non-alcoholic beverages (+3.4%) were the largest contributors to annual inflation over the last 12 months.

Housing inflation captures factors such as rent, the cost to build a new home and electricity. Established housing costs are not included.

The main contributors in this basket were electricity (+21.5%), rents (+3.9%) and new dwellings (+3.0%).

High housing costs are continuing to put pressure on inflation. Picture: Getty

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There are some nuances in the data, the annual rise in electricity costs is primarily related to state government electricity rebates being used up by households, the ABS noted. Excluding rebates, electricity prices rose 4.6% in the 12 months to December, unchanged from the 12 months to November. 

Rising home loans

Assuming a starting rate of 5.76%, Mortgage Choice has calculated the extra amount borrowers with various mortgage levels would need to pay if the RBA were to raise the cash rate next week.

The RBA board will meet for the first time this year from 2-3 February, after which a decision on whether to maintain or raise the current 3.60% cash rate will be revealed. 

This article first appeared on Mortgage Choice and has been republished with permission.