Last updated: February 16th, 2026
You’ve probably noticed it when you’ve been doing your weekly shop, or paying to renew your insurance. Household costs are climbing again. The so-called experts who made inflation forecasts were wrong.
The rate of price growth has taken inflation outside the 2%-3% band targeted by the Reserve Bank of Australia (RBA).
Right now, Australia’s inflation rate is 3.8% for the 12 months to December 2025, with a trimmed mean of 3.3%.
But many economists disagree that such a pessimistic outlook on inflation in Australia is warranted.
Higher inflation does mean the interest rate easing cycle is done and dusted. But we’ll probably avoid a harrowing hiking cycle in 2026, too.
| Key Takeaways: |
|---|
| Inflation has risen with the headline CPI at 3.8% and trimmed mean at 3.3%, mainly due to electricity – but households are still paying more for essentials. |
| Rents and services like healthcare and education are still hitting hip pockets hard, reflecting domestic price pressures. |
| Australia’s inflation and rate-cutting cycles have lagged major economies like the US, but our progress isn’t out of step with global counterparts. |
Is The Worst Behind Us?
I wish it was.
In its decision to lift the cash rate on 3rd February 2026, the RBA Board said inflation is likely to remain above target for some time:
Capacity pressures (a mismatch between demand and the available supply) have been greater than expected, so the RBA acted to cool private spending.
Important!
The RBA has revised up its estimate for underlying inflation, which it believes will remain above the 2-3% target range until mid-2027.
Above: The RBA’s upward revision of inflation forecasts reflects more persistent economy-wide capacity pressures.
If the hawkish tilt has the desired effect in reducing inflation, many economists are predicting just one additional rate increase in 2026.
Important!
CommBank is predicting a second 0.25% hike in May 2026 for a terminal cash rate of 4.10%. That view is shared by Westpac and NAB.
ANZ’s Head of Australian Economics, Adam Boyton, thinks that cash rate will stay at 3.85%, due to slowing real income growth and low consumer confidence - combined with disinflationary effects from the first hike.
Predictions for the Consumer Price Index rate in 2026 from banks include:
| Bank | 2026 Q2 | 2026 Q4 |
|---|---|---|
| Westpac | 3.7% headline 3.5% trimmed mean | 3.2% headline 3.0% trimmed mean |
| NAB | 0.7% q/q change to trimmed mean | |
| CommBank | 3.4% trimmed mean | 2.8% trimmed mean |
| ING | 3.0% | 2.4% |
Will Inflation Slow Down In 2026?
Price pressures are expected to abate in 2026.
Companies were able to pass on more of their costs (through higher prices) in the second half of 2025 due to a spike in consumer demand, the RBA said.
Some of these price increases are viewed as temporary (e.g., fuel). Some are attributed to people bringing forward their expenditure (e.g., buying at sales instead of waiting).
But capacity constraints will see services' inflation stay high for a while yet.
The ABS Monthly Household Spending Indicator for December 2025 (released 9th February 2026) shows spending grew month-on-month in September, October and November 2025.
Above: Household spending data across 2025 showed cooled consumer spending after a spike at the start of the year.
Spending showed signs of easing in December, falling by 0.4%. Outlay on both essentials and splurges dropped.
Rent increases have eased from the extremes seen in recent years, but low vacancy rates mean rental prices keep climbing.
(Related: How Is The Australian Economy Doing?)
According to Sam Tate, Head of Property at SQM Research, it’s still a landlord’s market:
- The national vacancy rate was 1.4% in December 2025, which is up from 1.3% in November but still below long-term averages. Vacancies are below 1% in Adelaide, Perth and Hobart.
- National asking rents for houses and units combined have risen by 5.8% over the 12 months to January 2026 – with the average weekly rent at $684.62. To rent a house in Sydney, you’ll pay $1,113 per week on average.
Did You Know?
December monthly CPI figures showed easing of annual rental price inflation, which rose 3.9% compared to 4.0% in November 2025.
Above: Food and beverage inflation rose in December, including prices for staples like meat, fruit and vegetables.
Doing your weekly grocery shop is still painful on the hip pocket.
Food and non-alcoholic beverages price growth increased, with a 3.4% annual change in December 2025.
Aussies paid more for:
- Eating out and getting takeaway, which was up 3.5%.
- Meat and seafood, especially beef, which rose 4.4%.
- Fruit and veggies, due to shortages, which were up 4.0%.
Electricity costs continue to be a huge burden for households, with government subsidies being used up — rising by 21.5%.
Other significant price increases in the 12 months to December 2025 were:
- Domestic travel and accommodation (9.6%).
- Snacks and confectionery (6.5%).
- Education fees (5.4%).
- Alcohol and tobacco (4.8%).
- Non-alcoholic beverages (4.0%).
- Medical and health services (3.6%).
What Is The Australian Government's Inflation Forecast?
In its 2025-26 Mid-Year Economic and Fiscal Outlook (MYEFO) update, Treasury forecast that inflation will be 3.75% in 2025-26.
It expects inflation to moderate to 2.75% in 2026-27.
The RBA forecasts have inflation rising from its current point to 4.2% (headline) and 3.7% (trimmed mean) by June 2026.
We’ll end 2025 with headline CPI inflation of 3.6% and underlying inflation of 3.2%, it estimates.
Further out, the RBA’s outlook (from February 2026) sees:
- Headline inflation falling to 2.9% by June 2027 (compared to 2.7% forecast in November).
- Underlying (trimmed mean) inflation falling to 2.8% in June 2027 (previous forecast 2.6%).
Important!
The current outlook doesn’t see underlying inflation hitting close to the mid-point of the 2-3% target (which is the RBA’s goal) until mid-2028.
Above: The forecast is based on the cash rate implied by market pricing, which assumes two 0.25% hikes in 2026.
Key things to watch, as identified by the RBA, include:
- Demand is stronger or weaker than expected. The impact of temporary inflationary factors could be overestimated, meaning there’s a risk inflation could remain higher for longer.
- Jobless numbers could loosen too much or the labour market may tighten further, adding to capacity pressures that lift wages, increase business costs and lead to higher prices.
- Global growth could falter, as trade barriers could change again or financial markets with stretched valuations could tumble. But fiscal policy (e.g. China stimulus) could add to demand.
- Domestic supply capacity estimates could be wrong. If so, "the gradual easing in conditions could result in individuals exiting the labour force due to increased difficulty finding work,” making the market even tighter.
The next available monthly CPI data from the ABS will be on 25th February 2025.
Did You Know?
Quarterly CPI prints are being phased out over the next 18 months as the ABS collects the additional data needed to effectively report on patterns in its new monthly inflation data series.
Why Is Australia’s Inflation So High Again?
On the one hand, the effect of 13 interest rate rises from the RBA across 2022-23 did seem to reduce price pressures.
On the other hand, household spending has been rising, and the cost of labour remains high even as productivity stagnates.
Both factors encourage businesses to lift prices.
The June 2025 CPI print revealed that trimmed mean inflation – the Reserve Bank’s preferred measure – slowed to 2.7%, the lowest it had been since December 2021.
But the June 2025 CPI print also revealed that trimmed mean inflation – the Reserve Bank’s preferred measure – increased to 3.0%.
The biggest contributor to the inflation spike? Energy costs.
Electricity prices rose since the previous quarter (up 9.0%) and saw annual price growth of 23.6%.
The massive increase was the result of:
- Electricity becoming more expensive, following annual price reviews that came into effect from July 2025.
- Government rebates finishing, with consumers in QLD, WA and TAS in particular now having to fork out more.
The unwinding of government subsidies, and an increase in electricity prices also impacted September’s CPI data.
Complicating matters is the way President Trump’s extraordinary tariffs have led to financial market mayhem, retaliatory moves, and a general climate of uncertainty.
At this stage, tariffs aren’t expected to significantly dampen Australia’s economy.
But the longer-term effects on supply chains and inflation aren’t fully understood.
With goods and services inflation still problematic and the context of global volatility, September’s CPI result primed the market to expect a return to hawkish sentiment by the RBA.
Important!
Many pundits expected the RBA to hold rates in November, with market pricing putting the chances of a cut at less than 40%.
Following its meeting on 4th November, at which the Board left rates unchanged at 3.60%, Governor Michele Bullock didn’t talk up the chances of a fourth rate cut in December.
Bullock characterised the September quarter inflation surprise as a “blip” and suggested that we’re still headed in the right direction.
Important!
Many economists were still predicting at least one additional cut in 2026, until the October 2025 CPI print came in hotter than expected.
Expectations moved from policy easing to policy tightening after the November CPI number came in at 3.4% (despite this being better than the forecast 3.6%).
That’s largely because the labour market is robust.
Unemployment fell unexpectedly in December 2025 from 4.3% to 4.1%.
Bloomberg reported the result prompted traders to increase their bets that RBA would be forced to raise rates - pricing in a 60% chance of a hike, compared to less than one-third odds prior to the jobs print.
A consumer spending recovery - combined with low unemployment - means the RBA is primed to put a lid on economic activity for now.
Is The Australian Economy Doing Worse Than The US?
Australia’s inflation and rate-cutting cycle was lagging behind those of other major economies in 2024, particularly the US.
But with Trump’s chaotic return to power, the US Federal Reserve switched to a ‘wait and see’ approach.
Stock markets fell sharply after President Donald Trump’s ‘Liberation Day’ announcement in April, in which he applied a universal 10% tariff on all imported goods and higher rates on countries such as China.
Uncertainty over the inflationary effects from the tariffs had the Fed on hold until September, when it delivered a 0.25% cut to bring US interest rates to 4%-4.25%.
A weakening US labour market was the key trigger, according to Wells Fargo senior economist Sarah House.
With Donald Trump breathing down their necks, a rising CPI, and bleak jobs data, the Fed cut a further 25 basis points in October and December of 2025. Its rate now sits at 3.50%-3.75%.
Chair Jerome Powell blamed Trump policies for driving inflation.
Did You Know?
By comparison, the RBA initiated cutting in February 2025, and delivered three 0.25% cuts to reduce Australia’s policy rate from 4.35% to 3.60% — before lifting it back up to 3.85% in February.
In its most recent outlook, the February Statement on Monetary Policy, the RBA notes that economic activity has been more resilient than expected in light of US tariffs.
But risks abound.
Important!
The US annual inflation rate is now 2.7% after seeing price growth for five consecutive months, including a 0.4% increase in August, a 0.3% increase in September, and a 0.3% increase in December.
The US Federal Reserve’s projections (released December 2025) have median PCE inflation at 2.1% in 2026, up from its September prediction of 2.0%.
It remains to be seen whether the US can avoid stagflation risks with President Donald Trump inciting high levels of volatility as he enacts his policies, tariff threats and various schemes.
What Factors Cause Inflation To Persist?
You can look at the Australian economy in one of two ways:
- Close-up. Consider interest rate rises, inflation data, food prices, unemployment rate, etc.
- Big picture. Study geopolitical issues, long-term trends and historical patterns.
Both are important. But in times of stress, humans overestimate the impact of the former and overlook the indirect (yet powerful) impacts of the latter.
The following micro and macro issues could have an impact in 2026:
1. Geopolitical Turmoil.
Further slowing of growth in the Chinese economy and ongoing conflicts in Russia/Ukraine and the Middle East are of concern.
The Israel-Hamas peace deal remains fragile, and uprisings in Iran have further destabilised the region.
Tensions with Hamas, Lebanon, Iran and Houthi rebels that have been attacking ships in the Red Sea could all escalate once more.
The lingering threat continues to disrupt shipping to the detriment of supply chains.
In addition to supply disruptions, oil-producing countries - such as OPEC members and Russia - can have an outsized influence on the economies of rivals by manipulating the price of crude oil exports through reduced production.
Important!
More expensive oil contributes to the already strained cost of living in major economies like the US.
Chief economist at investment firm TCorp, Brian Redican said in June 2025:
2. Rising Employment And Wages.
With inflation getting under control, employment levels will come into greater focus for the RBA.
The Fair Work Commission announced a 3.50% increase to minimum and award wages that took effect from 1st July 2025 - in an effort to reverse the decline in real wages due to inflation.
The Wage Price Index rose by 3.4% annually based on data from the September 2025 quarter.
Expert Tip.
Combined with rising real wages, it gives people more money to spend, increasing demand for goods and services and the impetus for corporations to lift prices.
3. Government Spending.
Fiscal policies impact how consumers and businesses make financial decisions.
This is why major government infrastructure projects, investments, subsidies and stimulus come under close scrutiny.
The Albanese Government’s budget for 2025-26 included more measures aimed at reducing inflation.
Among them are new tax cuts for workers earning between $18,201 and $45,000; increasing Medicare levy thresholds; more energy bill rebates; and cheaper medicines.
AMP chief economist Dr Shane Oliver said that alongside an uptick in private demand, the level of government spending (at a record 28% of the economy) was the basic problem.
Failure to cut government spending risks higher for longer inflation, and puts all the pressure on consumers to cut spending and businesses to cut investment, he argued.
Above: Public spending since COVID. When will it stop rising?
Temporary inflation-busters from the last budget will soon unwind.
An end to temporary power bill subsidies from the last budget was a major reason inflation ticked up again recently.
4. High Migration Levels.
Albanese’s government faced heat after Australia’s migration boom dwarfed treasury forecasts, with a net gain of over 500,000 people in 2022-23, according to ABS stats.
In 2023-24, net overseas migration was 446,000.
Immigration levels have eased since then.
- In 2024-25 we saw net overseas migration of 306,000.
- Migrant arrivals declined by 14%, and departures increased.
Australia’s rental market is still tight, resulting in rental price inflation rising 3.9% annually, according to the latest CPI numbers.
Above: Some of the most significant price rises occurred in the rental market.
What Is The History Of Inflation Rates In Australia?
Australia saw several spikes in the inflation rate in the 70s, 80s and 90s.
The RBA adopted the 2-3% inflation target in the early 1990s, with cash rate changes as the primary tool to stimulate or dampen economic activity and keep inflation stable.
Pent-up demand from that period was cited as a major cause of skyrocketing inflation as pandemic restrictions eased.
Australia’s inflation rate hit a 22-year peak in December 2022, reaching 7.8%.
Above: Consumer price index averages can obscure price movements in different parts of the economy. Services, rent, food, and recreation contribute the most to annual CPI movement currently.
How Does Australia’s CPI Compare Globally?
Australia’s inflation rate had been one of the worst among advanced economies in 2023-24.
And there was evidence that inflation was easing more quickly elsewhere.
Did You Know?
US annual CPI fell in March 2025 by 0.1% but has risen every month since June 2025 — bringing annual inflation to 2.7%.
In the UK, inflation fell back to 2% for the first time in nearly three years in May 2024.
But it started rising again in late 2024, and reached 4.8% in July before tracking downwards again.
Its CPI figure is currently 3.4% (up from 3.2% in November).
In a pre-budget speech delivered in November, UK Treasury chief Rachel Reeves said quashing inflation was a focus:
Above: The Economist coined a measure of “inflation entrenchment", a statistic used to demonstrate the stickiness of inflation. Australia was leading the pack in early 2024, likely due to some of the most generous pandemic stimulus measures.
In its economic outlook published in December, the OECD said that global growth had been resilient but “underlying fragilities are increasing”.
The risks including weakening labour markets, trade barriers, weak confidence, lingering fiscal concerns and more uncertainty.
Inflation across G20 countries is now projected to decline from 3.4% in 2025 to 2.8% in 2026.
Above: Actual duties collected are only now starting to align with the effective tariff rates, meaning costs of goods will likely increase.
The OECD said in addition to more tariff costs being passed on to consumers, there’s also evidence tariffs are reducing demand.
Frequently Asked Questions About The Australian Inflation Rate.
If you find macro and microeconomic concepts difficult to wrap your head around, you're not alone. Get up to speed with my definitions below.
Headline Consumer Price Index vs Underlying CPI: What's The Difference?
Headline and underlying CPI are two different ways to interpret the price change data collected by the ABS.
- Headline inflation describes the overall quarterly and year-over-year change in goods and services prices, based on the entire basket of items the ABS uses to calculate price changes. This can be distorted by Black Swan events (e.g., when flooding hurt veggie producers, causing a spike in the price of the humble lettuce).
- Underlying inflation is based on analytical measures of the CPI, intended to omit or smooth over quarterly price volatility. Underlying inflation calculations provided by the ABS include the Trimmed mean and Weighted median.
Another way CPI is analysed is the ‘Seasonally adjusted’ figure that accounts for regular seasonal price movements, such as an increase in the price of education in March each year.
The measure spreads out the impact of ‘seasonal’ pricing over the year.
Headline inflation is currently higher than the trimmed mean (3.8% vs 3.3%).
Above: Australian Consumer Price Index vs Trimmed Mean.
How Is The Consumer Price Index (CPI) Calculated?
Staff from the ABS investigate current prices on a fixed ‘basket’ of things that an Australian household would typically spend their money on.
It includes groceries, housing, transport, healthcare, entertainment, and utilities (around 1 million prices are collected every quarter).
They calculate the price change from the previous quarter in aggregate to determine an overall inflation rate.
- The ABS also publishes price changes across various groupings of goods and services — as some areas contribute more significantly to headline inflation.
- For example, in the 12 months to December 2025, insurance and financial services prices rose 2.5%.
Note that since the ABS moved from quarterly to monthly CPI readings in 2025, inflation changes from April 2025 onwards are calculated by comparing each month to the same month in the previous year (rather than comparing corresponding quarters).
What Is Inflation?
Inflation is a consistent, economically significant price rise across the economy.
Practical Example.
If the average price of insurance and financial services rose by $1,000 across the country, that would be considered inflation. If the price of these services rose in a single city, it would not be considered inflation.
Most often, inflation is caused by an imbalance in the supply and demand of money.
Why Is Inflation Dangerous?
Inflation can become a self-sustaining cycle. History is full of examples where out-of-control inflation brought relatively strong economies to their knees.
- Higher prices encourage workers to demand higher pay.
- Higher pay translates into higher overheads for businesses.
- Businesses charge higher prices to maintain profitability.
Higher prices make goods and services less affordable to everyday people, who demand higher wages again.
What Caused The Post-Pandemic Spike In Australia's Inflation?
During lockdowns, the Australian government rolled out one of the most generous stimulus packages in the world.
Can Inflation Lead To A Recession?
Yes.
Rises in inflation, combined with interest rate rises, can force people to spend less while encouraging businesses to lay off employees. Unemployed people are less likely to buy goods and services, accelerating the downturn.
Did You Know?
The definition of 'recession' is two consecutive quarters of negative GDP growth.
Final Words On Rising Inflation Rate In Australia.
While there’s always a risk that prices will continue to surge, most experts agree Australia’s core inflation rate will stabilise within the target range in 2026-27.
Higher-than-expected private demand and the end of government subsidies led to a larger CPI blip than forecast.
While that’s expected to gradually work its way out of the economy — in the meantime, the cost of many essentials is rising.
And nobody knows for sure whether monetary policy — with the cash rate now at 3.85% — will restrict spending enough and how the chips will fall in relation to other macroeconomic factors like global supply, GDP growth and unemployment.
Jody
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