There is a kind of sickness in Australia’s coverage and discussion about the economy – an obsession that interest rates need to do something. Go up, go down – anything! Unemployment fell, interest rates must do something (apparently fewer people being out of a job is bad and needs to be cured). Oh no, inflation went up in one month – we need interest rates to do something!!
We see this as well with investors – or let’s be honest, speculators – who are determined that interest rates will go up next week.
Even before the December CPI figures were released, investors were betting (and that is all it is) that there was a 58% chance the Reserve Bank of Australia would increase rates on 3 February:
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After the figures were released, showing inflation rose from 3.4% in November to 3.8% in December, the market moved to price in the chances of a rate rise at closer to two chances in three.
The Australian dollar also had a bit of a bump. This is because international investors who think rates will go up need to buy Australian dollars in order to buy Australian bonds and other financial instruments that will start getting higher interest returns.
So, when more people want Australian dollars, the “price” (or exchange rate) goes up. Since the December unemployment figures showed a big drop in unemployment to 4.1%, investors have been betting a rate rise is coming.
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The December inflation figure of 3.8% would suggest this as well – especially as in December alone, inflation rose a pretty huge 1%:
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But let’s look at that 1% jump.
If you are thinking that seems a bit big – perhaps even bigger than you experienced – well, you are probably right. International holidays and travel accounted for 71% of all of the inflation in December, and domestic holidays accounted for another 26%.
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So large was the contribution of holiday prices, that if you removed those from the overall figures, inflation in December rose just 0.02%, and the annual growth of inflation would have remained steady:
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Now, that does not mean that the RBA will put its feet up and decide things are sweet. Even without holiday travel, inflation of 3.3% is higher than it would like. But it does suggest that the bank really should not get too excited about these figures.
Over the past year, the big driver of inflation was international holidays and also electricity. However, while electricity accounted for about 10% of all the increase in inflation in the past year, almost all of it was due to the removal of energy subsidies in Perth and Brisbane.
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Electricity prices in Brisbane in December 2025 were 456% higher than they were a year earlier – because in December 2024 the state energy subsidies were in place. Similarly, in Perth, apparently electricity prices rose 75%, whereas again it was just the impact of the state subsidies.
Removing the big erratic items of holidays and electricity, annual inflation peaked in October at 3.1% and in both November and December it steadied at 3.0%.
Now obviously you can play around with the numbers to get whatever result you like, but it does show the danger for the RBA (and any speculators) being fixated on the overall number and not looking more closely.
The Reserve Bank will examine the old quarterly figures as well. These showed CPI in the December quarter rise a modest 0.6%, while the trimmed mean (or underlying) inflation rose 0.9%. The annual figures for both increased, but again this was due to electricity subsidies – as the old figures included them; the latest ones do not.
So what will the RBA do next week? The easy thing is to raise rates. There are plenty of economic and financial chin scratchers around who love the idea of higher interest rates. If they raise rates they will get little criticism – after all the market wants them to raise rates.
But there is no sign that wages are taking off, even though unemployment is below 4.5%. Indeed, the latest job vacancy figures suggest that it is getting harder to find work, not easier – and that suggests wage growth will also keep slowing.
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The easy thing for the RBA to do is raise rates, point to the overall inflation figures and hope no one looks any further. The smart move is to look closer, and wait.
Greg Jericho is a Guardian columnist and chief economist at the Australia Institute