2025 Ends with Inflation Surpassing Projections
As 2025 concludes, Australia is experiencing inflation rates that exceed projections. This trend is prompting expectations of a possible interest rate increase by the Reserve Bank of Australia (RBA) in early 2026.
Inflation Rate Surges at Year-End
According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) increased by 3.8 percent annually in December, climbing from 3.4 percent in November. In December alone, prices rose 1 percent.
Underlying Inflation Trends
The trimmed mean, a key measure of core inflation, showed a rise of 3.3 percent year-on-year in December, up from 3.2 percent in November. This data suggests a persistent upward trend in inflation.
Implications for Interest Rates
Economists widely agree that the unexpected inflation spike increases the likelihood of a rate hike by the RBA. The central bank typically aims for inflation to remain within a target band of 2 to 3 percent annually. Given the current figures, which exceed this target, the RBA is likely to respond appropriately.
- Projected Decision: RBA to convene on Tuesday for its first meeting of 2026.
- Expert Opinion: Abhijit Surya from Capital Economics asserts a rate rise is “all but certain.”
Ongoing Shelter Inflation Concerns
The inflation rate for housing costs continues to rise. Rental inflation increased from 3.8 percent to 4 percent — the highest it’s been in seven quarters. Similarly, the costs associated with new dwellings rose from 0.9 percent to 2.5 percent, marking a significant yearly increase.
Factors Contributing to Inflation
The major contributors to the annual inflation rate included:
- Housing: +5.5 percent
- Food and Non-Alcoholic Beverages: +3.4 percent
- Recreation and Culture: +4.4 percent
Electricity costs also showed a notable rise, increasing by 21.5 percent year-on-year in December. This uptick is reportedly linked to state government rebates being exhausted by households in Queensland and Western Australia.
Long-Term Outlook
The RBA maintains a long-term perspective on inflation, as noted by deputy governor Andrew Hauser. While the immediate data signals potential tightening, there is an understanding that inflation cycles may play out longer than anticipated.
Market Predictions
Prior to the CPI release, markets indicated a 60 percent chance of a rate hike. According to economist Devika Shivadekar from RSM Australia, the likelihood of a rate increase currently stands at approximately 55 percent. She suggests that the RBA may choose to act preemptively to manage inflation pressures effectively.
As 2025 ends with inflation surpassing projections, the RBA faces critical decisions that will shape Australia’s economic landscape in the coming year.
