Australia is facing a renewed inflationary surge that is intensifying cost-of-living pressures for households and driving expectations of interest rate increases in the first quarter of 2026. Latest data from the Australian Bureau of Statistics (ABS) shows that the Consumer Price Index (CPI) rose by 3.8 per cent over the year to December 2025, above market forecasts and outside the Reserve Bank of Australia’s (RBA) 2–3 per cent target band.
The spike in prices has been broad-based, with significant increases recorded across essential categories. Housing costs rose 5.5 per cent, food and non-alcoholic beverages climbed 3.4 per cent, and recreation and culture rose 4.4 per cent. Rising electricity costs played a major role in the inflationary surprise, with prices jumping about 21.5 per cent over the year as state government rebates expired, putting further pressure on household budgets.
Economists and markets are now widely pricing in an RBA interest rate increase in February 2026, as underlying inflation — measured by the trimmed mean (the RBA’s preferred gauge) — also climbed, reaching approximately 3.3 per cent annually. This persistent inflationary pressure has revived debates about monetary policy, with some analysts arguing that continued rate rises may be necessary to anchor inflation expectations and protect real incomes.
Rising living costs are not only driven by utilities and housing but also by everyday necessities. Price increases for meat and seafood, fruit and vegetables, and meals eaten out reflect supply-side challenges, higher labour costs and global commodity pressures. These increases add up for ordinary consumers, amplifying the squeeze on household budgets already contending with higher rents and transport costs.
Surveys on inflation expectations suggest that many Australians are anticipating continued price pressures. Weekly data from ANZ-Roy Morgan shows inflation expectations remaining elevated, with expected annual inflation above 5 per cent in early 2026 — a level that can influence consumer behaviour and wage demands.
The political and economic implications are significant. Rising inflation has become a flashpoint in public debate, with both major parties and analysts arguing over the causes and best policy responses. Higher prices have the potential to erode real wages, squeeze discretionary spending and increase financial stress among mortgage holders if interest rates rise.
Broader cost-of-living impacts
Cost-of-living pressures have been felt unevenly across the economy. Essential goods, utilities and housing costs are eating into household incomes, while rents and travel expenses also contribute to inflationary pressures. Retail sectors have warned that ongoing price rises can weigh on consumer demand and profitability.
At the same time, policy responses are under scrutiny. Some state governments have linked public sector wages to inflation triggers, resulting in automatic pay increases for certain workers. While these measures provide targeted relief, they also feed into broader discussions about wage growth, inflation expectations and fiscal sustainability.
In summary
Australia’s latest CPI data shows inflation running persistently above the RBA’s target, driven by rising housing, energy, food and services costs. This has intensified public concern over the cost of living and significantly raised the likelihood of interest rate tightening in early 2026, with implications for households, markets and economic policy debates.
