The inflation jump means the RBA could start raising rates from next week – realestate.com.au

New high inflation has increased pressure on the Reserve Bank to raise rates again next week, putting borrowers on notice.

The consumer price index (CPI) rose 3.8% in the 12 months to December, a strong increase from the 3.4% recorded in November.

The rebound was above market expectations of 3.6% and brings inflation back to October levels.

Although the high figures reflect expected spending in the run-up to Christmas and during the summer holidays, essential services such as electricity costs were one of the biggest contributors to inflation.

The jump is likely to be enough for the RBA to trigger a tightening cycle as early as next week, market prices show.

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

A closer look

RBA Governor Michele Bullock warned late last year that the bank expects higher inflation rates until mid-2026, largely due to expiring electricity rebates across the country.

While this is concerning for borrowers, the bank also focuses its interest rate decisions on underlying inflation, known as the trimmed average.

That all-important figure is calculated by ‘cutting out’ the most volatile items the CPI considers, the items with the biggest price changes such as electricity, to get a more realistic picture of the underlying inflation trend.

The reduced average inflation rate stood at 3.3% for the twelve months to December, down from 3.2% in November. Although less volatile than the headline rate, the trimmed average inflation rate is also considered ‘stickier’, meaning it can take longer to develop in either direction.

Both headline and reduced average inflation are now well outside the RBA’s target of 2-3%, leaving the RBA little choice but to take action to contain inflation, according to a growing number of economists.

What caused the CPI to rise?

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

Housing inflation includes factors such as rent, the cost of building a new home and electricity. Fixed housing costs are not included.

The main contributions to this basket came from electricity (+21.5%), rental prices (+3.9%) and new housing (+3.0%).

There are some nuances to the data: the annual increase in electricity costs is mainly related to state government electricity rebates being used up by households, the ABS said. Excluding discounts, electricity prices rose by 4.6% in the twelve months to December, unchanged from the twelve months to November.

Rising home loans

Assuming a starting interest rate of 5.76%, Mortgage Choice has calculated the additional amount borrowers with different mortgage levels would have to pay if the RBA were to increase the cash rate next week.

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

This article first appeared on Mortgage choice and is republished with permission.