Australian Economy Weekly Update — Week Ending 30 January 2026
The ABS December CPI release signals a renewed inflation challenge for the Australian economy and materially increases the likelihood of tighter monetary policy in the near term. Headline CPI rose to 3.8 per cent over the year to December, above expectations and up from 3.4 per cent in November. More importantly for the Reserve Bank of Australia (RBA), underlying inflation rose to 3.4 per cent in the December quarter, exceeding both the RBA’s forecast and the midpoint of its 2–3 per cent target range. This marks a second consecutive quarterly increase in core inflation, suggesting that disinflation momentum has stalled.
The composition of inflation is concerning from a policy perspective. Price pressures are broad-based, with more than two-thirds of CPI components rising faster than 3 per cent over the year. Housing-related costs remain a key driver, reflecting higher electricity prices following the expiry of rebates, as well as elevated construction and rental costs. Services inflation also remains firm, pointing to ongoing domestic capacity constraints and resilient demand. While some price increases were seasonal, the breadth of the outcome reinforces the RBA’s assessment that inflation pressures are increasingly persistent and domestically generated.
Financial markets have responded by sharply repricing near-term policy expectations. Market pricing now implies around a 75 per cent probability of a 25 basis point rate rise at the RBA’s February meeting, and all four major banks now expect the RBA to resume tightening. The key debate has shifted to whether such a move represents a one-off “insurance” hike or the start of a renewed tightening cycle, with some banks forecasting additional increases to reverse what they view as excessive policy easing last year.
The inflation outcome has also reignited debate over the role of fiscal policy and supply-side constraints. While the government has downplayed the contribution of public spending to inflation, economists and business groups have highlighted weak productivity growth and capacity limits as factors exacerbating price pressures. For the RBA, these dynamics increase the risk that inflation expectations become entrenched if policy does not remain sufficiently restrictive.
Source: Australian Bureau of Statistics, Consumer Price Index, Australia, December 2025