Inflation hotter than forecast at end of 2025, adding to rate hike expectations

Repayments on mortgages and debts are more likely to increase, after a higher-than-expected Inflation result puts pressure on the Reserve Bank to lift interest rates in response next week.

The speed of annual prices rises accelerated at the end of 2025, picking up more than forecast and adding to expectations of rate hikes — which the central bank uses to lower the temperature of the economy.

The Consumer Price Index (CPI) rose 3.8 per cent annually in December, up from 3.4 per cent in the year to November, according to the Australian Bureau of Statistics (ABS).

In the month, the CPI rose 1 per cent.

The trimmed mean, a measure of underlying inflation, rose 3.3 per cent annually in December, up from 3.2 per cent a month earlier.

The RBA’s interest rate setting board will deliver its first decision of 2026 this coming Tuesday.

Rate hike now more likely

Economists and analyst tend to agree that the ‘hot’ result makes it more likely the Reserve Bank will increase the cost of money.

The RBA sets a key interest rate, which repayments on mortgages and debts are then calculated on.

Because it wants prices to rise only between 2 to 3 per cent every year — what it calls the ‘target band’ — this new data showing inflation well above that will be influential in their decision-making.

Captial Economics Abhijit Surya says the sharper-than-expected rise in makes it “all but certain that the Reserve Bank of Australia will raise interest rates at its meeting next week”.

What he calls “shelter inflation” — the cost of housing — continues to pick up. Rental inflation lifted from 3.8 per cent to 4 per cent, its first increase in seven quarters. And inflation in the cost of new dwellings rose from 0.9 per cent to 2.5 per cent, its highest level in a year.

“With the housing market still running hot, shelter inflation is likely to rise further in the months ahead,” he added.

BDO chief economist Anders Magnusson suggests the Reserve Bank is now “primed” to lift interest rates.

He says the result “reinforces the message from the September quarter” that underlying price pressures are proving more persistent than expected.

“With inflation now overshooting the Bank’s forecast for two consecutive quarters, the likelihood of a rate hike has increased substantially. Markets were already pricing a significant chance of tightening, and today’s result will only strengthen that expectation.”

(Tightening means increasing the cost of money. By lifting interest rates, the repayments on money owed go up).

“It’s important to note that the RBA does not shift into a tightening cycle lightly. If the Bank does move to raise rates next week, it would signal that it sees long-term inflation dynamics emerging, not just a temporary overshoot. That would mark a meaningful shift in the monetary policy cycle.”

What did it? Lots of things, but mainly housing

The largest contributors to annual inflation over the last 12 months were housing (+5.5 per cent), food and non-alcoholic beverages (+3.4 per cent), and recreation and culture (+4.4 per cent), the ABS said.

The timing of electricity rebates continued to have an impact on the data. Electricity costs rose 21.5 per cent in the year to December, up from 19.7 per cent a month earlier, which the ABS said was largely due to state government rebates being used up by households in Queensland and Western Australia.

Excluding the impact of Commonwealth and state rebates in the past year, electricity prices rose 4.6 per cent in the 12 months to December, unchanged from November.

The Reserve Bank raised concerns when inflation moved back above the mid-point of its 2–3 per cent target band in the back half of 2025, but deputy governor Andrew Hauser earlier this month told ABC News the central bank takes a one-to-two-year view on inflation.

The ABS also released quarterly data, which is a longer-term data series closely monitored by the central bank and economists.

The CPI showed prices rising 0.6 per cent in the December quarter, or 3.6 per cent annually. The quarterly figures eased back from 1.3 per cent in the prior quarter, but rose on a yearly basis.

The quarterly trimmed mean came in at 0.9 per cent for the quarter, above forecasts of economists polled by Reuters. That saw the annual trimmed mean pick up to 3.4 per cent in the quarter.

Ahead of the CPI release, market pricing indicated around a 60 per cent chance of a rate hike next week.

More likely than not: economist

The top economist at RSM Australia, Devika Shivadekar, puts it at 55:45: meaning more likely there will be a hike than a hold.

“Today’s data supports a narrative of uneven but moderating inflation, where pockets of price pressure persist, yet the broader trajectory continues to grind lower rather than justify an imminent policy response” she says, in a statement responding to the data.

“The RBA’s patience may be wearing thin. A February hike cannot be ruled out if the Board judges that establishing a firmer policy stance early in the year is preferable, even if followed by a prolonged period on hold.

She sees it as a “narrow call”, around a 55:45 proposition.

“With the RBA potentially opting to move pre-emptively and hike now rather than risk having to tighten more forcefully later.”