High CPI print suggests May interest rate decision remains ‘live’
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More news: Higher than expected inflation data for January “means a pre-budget rate rise remains on the table, making May a pivotal month for the economy”, according to Deloitte Access Economics partner Stephen Smith.
However, he stressed the headline inflation figure is “heavily influenced by the end of energy bill relief”.
“While the Federal Government deserves credit for not continuing the electricity subsidies beyond December, today’s spike in headline CPI was always going to be the political payback of a populist policy,” Smith said.
Despite the high inflation print, Smith said the RBA is “likely to remain cautious and continue its ‘wait and see’ approach over the next few months”.
“With little chance of a rate hike in March, the next live RBA meeting will be in May, when the RBA will be able to take the temperature of the economy with the benefit of seeing the March quarter inflation figures,” Smith said.
BNY APAC macro strategist Wee Khoon Chong said the upside inflation surprise amid “tight labour market conditions and elevated wage growth, alongside ongoing inflationary pressures, are likely to keep the Reserve Bank of Australia on a tightening path”.
“We see a risk that the RBA turns more hawkish and exceeds market rate expectations. A more hawkish RBA is positive for the Australian dollar; we expect further AUD outperformance versus peers,” Chong said.
Chong said the market is pricing fewer than two hikes by the end of 2026, with the next as soon as May.
Bendigo Bank chief economist David Robertson said the RBA will still consider CPI to be “far too high, and combined” the low unemployment rate data released last week justifies the rates hike in February.
However, Robertson said the data “won’t necessarily translate to another hike in March”.
“The full quarterly inflation data on 29 April will be the key data point for the May RBA decision, but we will need to see an improvement in underlying inflation to avoid another hike in May,” Robertson said.
CPI increased 3.8% in 12 months to January
The news: The consumer price index (CPI) increased by 3.8% in the 12 months to January 2026, ahead of the consensus expectation for a 3.7% lift in the headline figure.
Trimmed mean inflation for the 12 months to January came in at 3.4%, also ahead of the market consensus expectation was for a 3.3% lift.
The numbers: The CPI increase in the year to January was unchanged from the 3.8% lift in December and ahead of the 3.3% increase in November.
Annual inflation was again predominantly driven by housing (+6.8%), followed by food and non-alcoholic beverages (+3.1%) and recreation and culture (+3.7%).
The rising in housing costs reflects new dwelling price (+3.5%) and rent (+3.9%) increases as well as electricity cost increases as households continue to be impacted by the timing of subsidies.
Electricity costs rose 32.2% in the year to January, up from the 21.5%, largely reflecting the “cessation of the [Commonwealth’s Energy Bill Relief Fun] rebates”. Excluding this impact, electricity prices rose 4.5% in the 12 months to January.
On a month-to-month basis CPI was up 0.4% in original terms and up 0.5% in seasonally adjusted terms. Consensus expectations were for a 0.3% increase in original terms and in seasonally adjusted terms.
The context: The RBA is expecting consumer inflation to remain above the midpoint of the central bank’s target band until early 2027, according to its February 2026 statement of monetary policy.
On Tuesday, RBA head of economic analysis Michael Plumb said it is “closely monitoring the incoming data” but stressed that the relatively new full monthly inflation measure will take the central bank “some time to understand the properties and seasonal patterns of the data”.
The RBA monetary policy board will next meet on 16 and 17 March before making a decision on whether to move the cash rate.
Ahead of the CPI release, some economists like those at Commonwealth Bank were expecting the next rate hike to come in May.
The sources: ABS media release, ABS data
