A further uptick in underlying inflation has opened the door to another cash rate rise as early as next month.
Data from the Australian Bureau of Statistics (ABS) on Wednesday showed the Consumer Price Index rose 3.8% over the 12 months to January, unchanged compared to December.
| Month | Headline CPI | Trimmed mean |
| Jan 2026 | 3.8% | 3.3% |
| Dec 2025 | 3.8% | 3.3% |
| Nov 2025 | 3.4% | 3.2% |
| Oct 2025 | 3.8% | 3.3% |
| Sep 2025 | 3.6% | 3.2% |
| Aug 2025 | 3.2% | 3.0% |
Underlying inflation, known as the trimmed mean, rose 3.4% over the 12 months to January, up from 3.3% in December.
The trimmed mean is an inflation measure which strips out the items with the biggest price jumps or drops to provide a less volatile picture of price movements.
Both measures of inflation remain firmly above the RBA's 2-3% inflation target, and have done so for six consecutive months, raising the prospect of another rate hike within months.
The latest data is hotter than economists were expecting.
Australians have seen headline inflation remain stable month-to-month over the year to December then January. Picture: Getty
“A pre-budget rate rise remains on the table,” Deloitte Access Economics partner Stephen Smith said.
“The Reserve Bank’s preferred trimmed mean measure was still too high for its liking.”
Commonwealth Bank had forecast a small drop in headline inflation for the 12 months January to sit at 3.7%, while also locking in an expectation of 3.3% for the trimmed mean. Westpac had also anticipated a trimmed mean figure of 3.3%, along with an even cooler CPI reading of 3.6% for headline inflation.
“The largest contributor to annual inflation in January was housing, up 6.8%, followed by food and non-alcoholic beverages, up 3.1%, and recreation and culture, which rose 3.7%,” ABS head of price statistics Michelle Marquardt said.
Annual housing inflation was 6.8% to January, up from 5.5% to December, reflective of the cost rises in electricity, new dwellings and rents, Ms Marquardt said. Price changes of existing homes are not captured in the CPI data.
“Electricity costs rose 32.2% in the 12 months to January, up from 21.5% to December," she said, noting the unwinding of government electricity rebates was behind the huge jump.
“Today’s spike in headline CPI was always going to be the political payback of a populist policy,” Mr Smith said of the rebates. “Electricity prices helped push headline inflation to an uncomfortably high.”
Speaking following the release of the inflation data, treasurer Jim Chalmers said ending rebates had been “a difficult decision” for the government.
Treasurer Jim Chalmers has commented on the inflation data. Picture: Hilary Wardhaugh/Getty Images)
“We know the impact it is having on families and on this data,” he said. “We can expect these sorts of numbers to continue, particularly in the first half of the year.”
Excluding the impact of federal and state electricity rebates over the previous year, electricity prices rose 4.5% in the 12 months to January.
Wage growth steady
New wages growth figures have also been published by the ABS this week, with the Wage Price Index (WPI) rising 0.8% in the December quarter of 2025 to an annual rate of 3.4% - meaning inflation is rising faster than wages.
A total $107.4 billion in wages in salaries was paid to workers across the nation in the final month of last year to match the growth seen at the end of 2024.
“The annual rise of 5.7% seen in both December 2024 and 2025 is lower than the 7.2% annual rise to December 2023, which included post-pandemic growth,” ABS head of labour statistics Sean Crick said.
“Annual growth includes the combined effects of changes over the year from underlying wage and employment growth, hours worked, and periodic payments.”
The RBA’s forecasting generally expects Aussies to spend more as they earn more, boosting demand for goods and services.
Moving towards next month’s interest rates decision, the RBA will consider the impact of inflation rising faster than wages.
Banks locking in
While many economists and markets are expected another rate rise from the RBA in May, major lenders are pressing forward with changes to home loans already.
Commonwealth Bank has hiked fixed rates by 0.25 percentage points, marking the second upwards move from the nation’s largest lender in less than two months.
Westpac has also increased fixed rates, opting to increase by an even larger 0.30 percentage points.
The moves bring the two lenders’ lowest fixed rate home loan options back to the 6% range.
As of Tuesday, the Australian Stock Exchange RBA rate indicator showed just a 9% expectation of a rate rise at the next board meeting on 17 March. That figure is expected to rise on the back of this most recent inflation data.
Governor Michele Bullock had her most recent planned questioning in front of MPs on 6 February. Picture: David Gray
Another cash rate increase could push rates to 4.10%, following the first rate rise in more than two years at earlier this month.
Speaking in front of the Standing Committee on Economics following the decision, governor Michelle Bullock pushed back on criticism of the bank’s handling of high inflation.
Ms Bullock acknowledged government spending was a factor in boosting inflation, "along with private spending" - after being backed into a corner in a heated round of questioning, admitting the bank's current forecasts “are very uncertain”.
In a separate appearance, the head of the RBA's economics analysis department, Michael Plumb, said "a number of indicators" had suggested to the bank that capacity pressures had picked up.
RBA head of economics analysis department Michael Plumb. Picture: RBA
"Financial conditions are inherently difficult to measure and no one metric provides a definitive picture," he said.
"In hindsight, the robust credit growth observed over 2025 – and the extent of the pick-up in private demand growth later in the year – raises the possibility that conditions were less restrictive than previously thought."
All eyes will be on government spending as the Federal Treasurer prepares to hand down the budget on 12 May.
Two more sets of inflation data will be published before then, while the RBA also has two chances to change the cash rate.
This article first appeared on Mortgage Choice and has been republished with permission.
English (US) · 