Australia’s annual inflation rate has unexpectedly decreased to 3.4%, raising hopes that the Reserve Bank of Australia (RBA) will refrain from increasing interest rates during its next meeting. The Australian Bureau of Statistics (ABS) released the consumer price index data on January 6, 2026, highlighting a drop from 3.8% in October. Economists had anticipated a lesser decline to 3.6%, making the current figures a positive surprise for mortgage holders.
Despite this drop, inflationary pressures remain a concern for the RBA. The trimmed mean inflation, which provides a clearer view of underlying price trends by excluding volatile items, fell slightly from 3.3% to 3.2%. This figure is still above the RBA’s target range of 2% to 3%, indicating that inflation is not fully under control.
Key Factors Behind the Inflation Changes
The decline in headline inflation was influenced by the expiration of energy rebates in Queensland, which saw electricity prices surge by 19.7% over the year leading up to November. While this contributed to a dip in overall inflation, the RBA will prioritize more persistent inflation components, such as new dwelling costs and market services.
In particular, prices for new dwellings increased by 2.8% compared to the previous year, up from a 1.7% rise recorded in October 2025. In contrast, rental prices saw a slight slowdown, decreasing from 4.2% to 4% in the same period. These mixed signals complicate the RBA’s upcoming decision on interest rates, scheduled for February 3.
Outlook for Interest Rates
The ABS’s monthly inflation measure is still in its early stages, and the central bank is expected to wait for the December quarter inflation figures, which will be released later in January, before making a final decision.
Despite the drop in inflation, some economists argue that interest rates should still rise. Warren Hogan, chief economic adviser at Judo Bank, expressed his views on Sky News, stating, “There’s less than a quarter of the CPI basket that is below the RBA’s target band. The reality is over the last six months the economy is improving and inflation is rising, so this rate they have is probably not appropriate. I think they should raise rates in February.”
As Australian homeowners keep a close eye on these developments, the interplay of inflation data and central bank decisions will be crucial in shaping the economic landscape for 2026.
