Soaring electricity bills and housing costs drive stubborn Australian inflation

David Koch says higher inflation seems ‘baked in’. Picture: Jono Searle

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ANALYSIS

The January Consumer Price Index numbers from the ABS came in flat at 3.8 per cent and a trimmed mean of 3.4 per cent (up slightly from 3.3 per cent in December), but there is one significant number that is sounding deafening alarm bells.

Housing, the dominant category of the CPI basket, saw inflation rise by 6.8 per cent year on year.

This is a massive surge from December, when the number was 5.5 per cent and November (5.2 per cent).

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It suggests the genie is well and truly out of the bottle when it comes to housing costs.

Housing has a 21.4 per cent weight in the overall CPI basket, meaning it contributed to 1.4476 percentage points out of the total 3.8; more than a third of the number and especially alarming compare to June last year, when it contributed just 0.3346 percentage points.

The next biggest contributor, food and non-alcoholic beverages, is weighted at 17.4 per cent of the CPI basket. But its inflation was 3.1 per cent, well below the overall CPI.

Housing construction costs continue to surge. Picture: Nikki Short

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Recreation and culture, transport and furnishings, household equipment and services were all major measures that came in below the 3.8 per cent mark.

For consecutive months, housing has been the driving force behind too-high inflation. In the CPI, housing measures construction costs and rental payments, but also in there is electricity.

Electricity costs rose 32.2 per cent in the 12 months to January 2026. That’s up from 21.5 per cent in the December 2025 CPI numbers. It’s a staggering increase, caused largely by commonwealth and state government electricity rebates beginning to roll off.

SQM Research managing director Louis Christopher said the effects of the electricity rebates may still be felt in coming months.

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“Electricity within housing was the single largest contributor to inflation, largely due to the roll off of the rebates,” Mr Christopher said, noting that Queensland and Western Australia still had rebates in place in January that were still to roll off.

SQM Research managing director Louis Christopher.

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New dwelling prices rose 3.5 per cent, while rents continue to rise at a worrying pace.

“Rents were up by 3.9 per cent, the second largest contributor to the CPI within housing,” Mr Christopher said, pointing out that raising rates can actually put upwards pressure on inflation in the rental category.

“In the current rental market with vacancy rates in the low to mid one per cent range, that’s a tight rental market and landlords have the power to pass on rate hikes to tenants,” he said. “And so the vicious cycle continues.”

Compare the Market economic director David Koch said higher inflation seemed “baked in” and that homeowners could expect further rate hikes this year, though not next month.

“I think the Reserve Bank will wait for the next quarter’s inflation figures to come out, to see if the most recent rate increase has had an effect,” Mr Koch said. “If they did move in March, it would have a huge psychological effect and come as a big shock to consumers.”