A further rise in underlying inflation has already opened the door for another rise in cash rates next month.
Data from the Australian Bureau of Statistics (ABS) showed on Wednesday that the consumer price index rose 3.8% in the 12 months to January, unchanged from December.
| Month | Headline CPI | Cropped mean |
| January 2026 | 3.8% | 3.3% |
| December 2025 | 3.8% | 3.3% |
| November 2025 | 3.4% | 3.2% |
| Oct 2025 | 3.8% | 3.3% |
| September 2025 | 3.6% | 3.2% |
| August 2025 | 3.2% | 3.0% |
Underlying inflation, known as the trimmed average, rose 3.4% in the 12 months to January, up from 3.3% in December.
The trimmed average is an inflation measure that pulls out the items with the largest price increases or decreases to provide a less volatile picture of price movements.
Both inflation measures remain well above the RBA’s inflation target of 2-3%, and have done so for six months in a row, raising the prospect of another rate hike within months.
The latest numbers are hotter than economists expected.
“A pre-budget rate hike is still on the table,” said Stephen Smith, partner at Deloitte Access Economics.
“The Reserve Bank’s preferred slimmed-down average benchmark was still too high for its liking.”
The Commonwealth Bank had forecast a small decline in headline inflation to 3.7% for the January 12 months, while also setting a forecast of 3.3% for the reduced average. Westpac had also expected a reduced average figure of 3.3%, along with an even lower CPI value of 3.6% for headline inflation.
“The biggest contributor to annual inflation in January came from housing, up 6.8%, followed by food and non-alcoholic drinks, up 3.1%, and leisure and culture, which rose 3.7%,” said ABS head of price statistics Michelle Marquardt.
Annual housing inflation stood at 6.8% in January, up from 5.5% in December, reflecting increases in the cost of electricity, new homes and rental prices, Ms Marquardt said. Price changes of existing homes are not included in the CPI data.
“Electricity costs rose 32.2% in the 12 months to January, up from 21.5% on December,” she said, noting that the phasing out of government electricity rebates was behind the huge jump.
“Today’s spike in the CPI was always going to be the political payback for populist policies,” Smith said of the cuts. “Electricity prices have helped push headline inflation to uncomfortably high levels.”
Speaking after the release of the inflation data, Treasurer Jim Chalmers said ending the cuts had been “a difficult decision” for the government.
“We know the impact this has on families and on this data,” he said. “We can expect these types of numbers to continue, especially in the first half of the year.”
Excluding the impact of federal and state electricity rebates from the previous year, electricity prices rose 4.5% in the twelve months through January.
Wage growth stable
This week also saw new wage growth figures published by the ABS, with the Wage Price Index (WPI) rising by 0.8% in the December quarter of 2025 to an annual rate of 3.4% – meaning inflation is rising faster than wages.
In the final month of last year, a total of $107.4 billion in wages were paid out to workers across the country, matching the growth seen at the end of 2024.
“The annual increase of 5.7% in both December 2024 and 2025 is lower than the annual increase of 7.2% to December 2023, which included post-pandemic growth,” ABS head of labor statistics Sean Crick said.
“Annual growth includes the combined effects of changes during the year in underlying wage and employment growth, hours worked and periodic payments.”
The RBA’s forecasts generally expect Australians to spend more as they earn more, increasing demand for goods and services.
Heading into next month’s interest rate decision, the RBA will consider the impact of inflation rising faster than wages.
Banks join in
While many economists and markets are expecting another rate hike from the RBA in May, major lenders are already pushing ahead with changes to home loans.
The Commonwealth Bank has increased its fixed rate by 0.25 percentage points, marking the second increase in less than two months against the country’s largest lender.
Westpac has also increased its fixed rates, opting to increase them by an even larger 0.30 percentage points.
These moves bring the two lenders’ lowest fixed-rate mortgage options back to the 6% range.
As of Tuesday, the Australian Stock Exchange’s RBA interest rate indicator showed just a 9% expectation of a rate hike at the next board meeting on March 17. This figure is expected to rise due to the latest inflation data.
Governor Michele Bullock had her most recent scheduled questioning in front of lawmakers on February 6. Photo: David Gray
A new rate hike could push rates to 4.10%, after the first rate hike in more than two years earlier this month.
In a speech to the Standing Committee on the Economy after the decision, Governor Michelle Bullock pushed back on criticism of the bank’s handling of high inflation.
Ms Bullock acknowledged that government spending was a factor in driving inflation, “along with private spending” – after being cornered in a heated round of questions, admitting the bank’s current forecasts are “highly uncertain”.
In a separate appearance, the head of the RBA’s economic analysis department, Michael Plumb, said “a number of indicators” had alerted the bank to increased capacity pressures.
Michael Plumb, head of the RBA’s economic analysis department. Image: RBA
“Financial conditions are inherently difficult to measure and no single metric provides a definitive picture,” he said.
“In retrospect, the robust credit growth observed in 2025 – and the magnitude of the recovery 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 announce the budget on May 12.
Two more sets of inflation data will be published before then, while the RBA will also have two chances to change the spot rate.
This article first appeared on Mortgage choice and is republished with permission.
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