Australia’s latest Consumer Price Index (CPI) data, released this week on January 7, 2026, presents a complex puzzle for the Reserve Bank of Australia (RBA) as it prepares for its February board meeting. Headline inflation moderated to 3.4% in the year to November, down from 3.8% in October and notably below the market consensus of 3.6%. While the “undershoot” initially eased immediate fears of a February hike, a closer look at the underlying metrics suggests the RBA remains in a difficult position. The Trimmed Mean, the central bank’s preferred measure of core inflation, only ticked down slightly to 3.2%, remaining stubbornly above the RBA’s 2%-3% target band. Furthermore, stickier components like housing costs (up 5.2%) and a surge in electricity prices (up 19.7% following the rollback of state rebates) indicate that domestic price pressures are far from extinguished.
From a policy perspective, this “disinflationary breath” provides the RBA with some optionality, but it likely won’t be enough to shift its hawkish stance. While headline figures are moving in the right direction, the persistence of services inflation and a tight labor market mean the risk of a “wait-and-see” approach turning into a policy error remains high. Major lenders like CBA and NAB continue to forecast a 25-basis-point hike to 3.85% in February, arguing that the RBA must act to prevent inflationary expectations from becoming entrenched. According to Bloomberg, the futures market positioning reflects that 22.3% of participants anticipate a 25 bps interest rate hike for the February 3rd 2026 meeting, a drop from 36.0% ahead of yesterday’s CPI release.
Consequently, the upcoming December quarter CPI print (due late January) will be the final arbiter; unless it shows a more aggressive softening in core services, the RBA may still opt for a “preventative” hike to ensure inflation returns to the midpoint of its target by 2027.
