Australia's Inflation Slows in November, but Core Inflation Remains Sticky

Australia’s headline inflation slowed slightly in November 2025, but core inflation remained elevated, raising concerns among policymakers and investors. The Reserve Bank of Australia (RBA) now faces mounting pressure to reassess its easing policy as inflationary pressures show signs of reemerging.

A recent survey of economists indicated that a growing number of forecasters anticipate at least two rate hikes in 2026 to counter persistent inflation. This marks a shift from earlier expectations of rate cuts, as financial markets have recalibrated to partially price in tightening.

RBA Governor Michele Bullock has warned that further tightening cannot be ruled out if inflation remains difficult to contain. This has led to a significant shift in market expectations, with traders assigning meaningful probabilities to a February rate increase.

Why Did This Happen?

Inflation in Australia had been expected to ease after a series of rate cuts by the RBA in 2025. However, late-year data showed unexpected strength in headline CPI, which rose to 3.8% in October 2025, well above the RBA’s target range of 2–3%. Core inflation also accelerated to 3.3%.

Several factors contribute to the stickiness of inflation. Housing and services costs remain elevated due to chronic supply constraints, rapid population growth, and rising wage growth. At the same time, unemployment has remained near historic lows, supported by strong public-sector hiring and reluctance among firms to cut staff.

How Did Markets React?

Financial markets have responded to the shift in RBA policy expectations by moving from pricing in rate cuts to partially pricing in rate hikes. The Australian Dollar (AUD) has benefited from this shift, with traders betting on a more hawkish RBA in 2026.

The AUD has been trading near 15-month highs against the US Dollar (USD), with technical indicators suggesting a bullish bias. The pair has rebounded from the lower boundary of an ascending channel pattern, with the 14-day RSI suggesting strong upward momentum.

Analysts have noted that the RBA’s February policy meeting is now a key focus for investors. A stronger-than-expected core inflation reading in the Q4 CPI report, scheduled for release on January 28, could prompt a rate hike.

What Are Analysts Watching Next?

Economists and traders are closely monitoring several key indicators to gauge the trajectory of inflation and potential RBA action. Inflation expectations remain elevated, with consumer inflation expectations rising to 4.7% in December 2025.

Analysts are also watching for signs of structural inflation pressures, particularly in the housing and services sectors. These sectors are expected to remain a drag on inflation moderation given ongoing supply constraints and tight labor markets.

The RBA’s December meeting minutes highlighted the central bank’s readiness to tighten policy if inflation does not ease as expected. This has added to the uncertainty surrounding the RBA’s policy path, with seven of the 38 economists surveyed anticipating a rate hike as early as February.

Investors are also watching for potential shifts in global monetary policy, particularly in the US. The Federal Reserve’s policy path remains a wildcard, with Fed officials divided on the timing and magnitude of rate cuts in 2026.

The Australian Open’s record prize fund and other economic developments, such as Saudi Arabia’s 2026 borrowing plan, are also being monitored for their potential impact on broader economic sentiment.

In summary, while headline inflation has moderated slightly, core inflation remains a challenge for the RBA. A shift in policy expectations and elevated inflationary pressures suggest that investors should remain cautious and closely monitor upcoming data and central bank actions.