Australian Inflation Reaches 3.6% in Fourth Quarter, Highest in 18 Months

Annual consumer price inflation in Australia accelerated to 3.6% in the fourth quarter of 2025, marking the fastest pace in six quarters and aligning with the median forecast compiled by Reuters. The latest figure, released by the Australian Bureau of Statistics (ABS) on Wednesday, follows a 3.2% reading in the previous quarter and cements expectations that the Reserve Bank of Australia (RBA) will tread carefully before considering any reductions in its policy rate.

On a quarter-over-quarter basis, prices advanced 0.6%, a significant moderation from the 1.3% rise recorded between April and June. While the slowdown in quarterly momentum suggests some easing of immediate price pressures, the headline annual rate remains above the RBA’s 2%–3% target band, reinforcing the message from central-bank officials that monetary policy is likely to stay restrictive for some time.

Housing Costs Drive Monthly Increase

For December alone, the ABS reported a 3.8% increase in consumer prices compared with the same month a year earlier, topping the 3.55% consensus projection. Housing costs were identified as the single largest contributor, with prices in that category climbing 5.5% year on year. Food and non-alcoholic beverages, along with recreation and culture, also exerted notable upward pressure on the monthly reading.

The ABS data indicate that housing-related expenses—such as rents, construction costs and utilities—remain a persistent source of inflationary strain despite a broader deceleration in other sectors. Food prices, while growing at a slower pace than in early 2024, continue to reflect higher input costs and supply challenges in certain agricultural commodities.

Central Bank Signals Caution

Policymakers have acknowledged the recent moderation in quarterly inflation yet describe the overall level as uncomfortably high. In comments delivered earlier this month, RBA Deputy Governor Andrew Hauser described inflation above 3% as incompatible with the central bank’s mandate. He also assessed the likelihood of rate cuts in the near term as “very low,” echoing the stance outlined by Governor Michele Bullock after the December policy meeting.

The RBA’s cash rate target currently stands at 4.35%, following a cumulative 425 basis points of tightening since May 2022. The central bank is scheduled to hold its next policy meeting in early February. Market participants broadly expect officials to leave the benchmark rate unchanged, but analysts caution that further hikes could be considered if incoming data point to renewed price stickiness. Shier Lee Lim, Lead FX & Macro Strategist for Asia-Pacific at Convera, noted that a “cautious stance” remains appropriate, and that additional tightening cannot be ruled out should inflation fail to retreat toward the midpoint of the target range.

Economic Growth Picking Up

The inflation release follows national accounts data showing that gross domestic product expanded 2.1% year on year in the third quarter, up from a revised 2.0% in the second. The rebound was driven largely by private-sector activity, which outpaced gains in public demand. The strengthening growth picture gives the RBA additional leeway to maintain a restrictive policy setting, as officials weigh the need to balance price stability with ongoing economic expansion.

Imagem: Finances

Although Australia’s output has proven resilient, higher borrowing costs are filtering through to households and businesses. Mortgage rates have risen in tandem with the cash rate target, and consumer confidence surveys indicate that sentiment remains subdued. Nevertheless, retail spending has not softened as sharply as some forecasters anticipated, suggesting that the transmission of tighter monetary policy is proceeding more gradually than in previous cycles.

Outlook for Policy and Markets

Financial markets have scaled back expectations for aggressive easing in 2025. Interest-rate futures now imply that the first potential cut could arrive in the second half of the year, contingent on a sustained decline in inflation toward the RBA’s target band. Short-term yields briefly edged higher after the ABS release but quickly stabilized as investors digested the broadly in-line outcome.

Currency markets responded in similar fashion. The Australian dollar initially firmed against the U.S. dollar but later retraced some gains as traders assessed the RBA’s likely reaction function. According to the [Reserve Bank of Australia’s most recent statement](https://www.rba.gov.au/monetary-policy/), officials remain focused on ensuring that inflation expectations stay anchored and that the labor market continues to move toward a sustainable balance of supply and demand.

Looking ahead, analysts will monitor upcoming labor-market, retail-sales and wage-growth reports for additional signals on the trajectory of domestic demand. Any evidence of persistent price pressures in services or a renewed surge in housing costs could tilt the balance toward further policy tightening, whereas a rapid cooling would bolster the case for a pause followed by gradual easing later in the year.

Crédito da imagem: Charlie Rogers | Moment | Getty Images