Inflation slows to 3.4 per cent, but fails to convince financial markets prices are under control

Inflation moderated late last year but not enough to reverse expectations of interest rate increases as soon as February.

The consumer price index rose 3.4 per cent in the year ended November 30, a dip from October’s 3.8 per cent annual pace and below market forecasts of 3.7 per cent.

But it remained above the Reserve Bank of Australia’s target, leading two of the nation’s big four banks to stick with predictions of a February rate hike.

Headline inflation has now been above the RBA’s 2-to-3 per cent target for four consecutive months, mainly due to the end of electricity rebates in Queensland and Western Australia and increases in the cost of housing and consumer services.

November’s drop in headline inflation was influenced by one-off factors, including plunging demand for holiday accommodation after crowds flocked to see the Brisbane Broncos narrowly beat the Melbourne Storm in the rugby league grand final in Sydney on October 5 during the school holidays.

Low unemployment worries the central bank too, economists said, because cashed-up consumers are competing for more products than the economy can produce, driving up prices.

“We’ve got a labour market that the RBA is having to say is on the tighter side of full employment so I think that would still leave some anxiety at the bank that they’re facing into an inflation outlook that’s not as benign as they hoped,” National Australia Bank chief economist Sally Auld told The Nightly.

Rate hike fears

The persistent inflation has raised fears Reserve Bank governor Michele Bullock’s board will increase interest rates on February 18 after its first two-day meeting for the year.

NAB expects two RBA rate hikes this year, in February and May, while the Commonwealth Bank, Australia’s biggest home lender, predicts an increase in February that would take the cash rate to 3.85 per cent, up from 3.6 per cent now.

The 30-day interbank futures market sees two Reserve Bank rate rises in 2026, which would take the cash rate to 4.1 per cent by next Christmas, reversing the effects of rate cuts in August and May last year.

Rate hikes this year are forecast to hit housing construction exacerbating a housing shortage.

The drop in headline inflation also coincided with an easing in domestic holiday costs to a more moderate annual pace of 3.3 per cent. This marked a big plunge from October’s 7.1 per cent surge when the National Rugby League grand final and the T20 cricket sparked strong demand for hotel accommodation.

“They do tend to flip around month to month. So, I don’t know that you’d be taking a huge amount of comfort in that,” Ms Auld said.

“Better than it could have been but I don’t think that means that we’re out of the woods yet.”

Power surge

Electricity costs soared by 19.7 per cent in the year to November and followed Queensland axing its $1000 annual rebate at the end of the last financial year as Western Australia discontinued its equivalent $400 rebate.

The Federal Government’s $300 annual rebate had been extended until the end of 2025 in the pre-election March Budget.

Treasurer Jim Chalmers, who declined to extend the rebate into 2026, noted the easing of inflationary pressures hadn’t made life easier for everyone.

“While we’ve made good progress on the economy together, we recognise the job is far from over because people are still under pressure,” he said.

Annual services inflation came in at 3.6 per cent in November, marking a moderation from October’s 3.9 per cent pace over the year.

Education costs rose by an even more dramatic 5.4 per cent over the year, ahead of housing on 5.2 per cent.

Over the year to November, goods inflation rose by 3.3 per cent, down from October’s annual increase of 3.8 per cent.

But clothing and footwear prices rose by 5.1 per cent, in a category where price pressures had until recently been contained.

Food and non-alcoholic drink prices climbed by 3.3 per cent over the year, making it one of the biggest contributors to overall inflation based on its dominance of the household budget.

Underlying inflation, without volatile price movements, came in at 3.2 per cent in the year to November, down from October’s annual pace of 3.3 per cent.

Building boom

November also saw 18,406 new residential building approvals, marking the best monthly result since February 2022 and a 15.2 per cent increase on October, based on much stronger approvals for the volatile apartment sector.

But the annual figure of 195,523 was still well below the 240,000 a year needed as part of the National Housing Accord plan to build 1.2 million homes in the five years to the end of June 2029, in a bid to tackle Australia’s housing affordability crisis.

The Commonwealth Bank is expecting rate hikes in 2026 to limit growth in new building starts.

“The ending of the RBA’s cutting cycle and the prospect of an interest rate hike will cap some of the upside for approvals in 2026,” associate economist Lucinda Jerogin said.

Big calls

The Reserve Bank, two days before Christmas, released minutes from its December 9 meeting noting the existing 3.6 per cent cash rate may no longer be “still a little restrictive”.

“The monthly consumer price index released today indicated that inflation remained persistent in November and rate hikes are on the table in 2026,” EY senior economist Paula Gadsby said.

“Inflation pressures are building as the economy remains capacity constrained. For the Reserve Bank to reverse this recent trend and get inflation moving back to the mid-point of the target band, interest rates will need to be lifted in the first half of 2026.”

The RBA’s next meeting is occurring after the Australian Bureau of Statistics releases inflation data for December on January 28.

“The RBA will stay on hold in February, though data to be released later in January – particularly the labour market and December inflation prints – will be important pieces of the puzzle,” Deloitte Access Economics partner Stephen Smith said.

A hike, however, was likely to be debated at the RBA’s next meeting, ANZ economists Adelaide Timbrell and Adam Boyton said.

“We expect the RBA to hold the cash rate at 3.60 per cent at its monetary policy board meeting next month. It will, however, be a close decision, and we’d expect a rate hike to be explicitly discussed,” they said.