Quarterly CPI analysis: CPI primes the RBA to increase the cash rate

The December quarter trimmed-mean Consumer Price Index (CPI) inflation data came in at 3.3 per cent, above the Reserve Bank of Australia’s (RBA) November forecast of 3.2 per cent. This reinforces the message from the September quarter that underlying price pressures are proving more persistent than expected. 

Rising probability of a rate hike

With inflation now overshooting the RBA’s forecast for two consecutive quarters, the likelihood of a rate hike has increased substantially. Markets were already pricing a significant chance of tightening, and the result will only strengthen that expectation. 

Labour market strength gives the RBA room to move

Further, the tight labour market provides the RBA with ample room to act. With unemployment still low and the economy operating close to capacity, the risk that higher interest rates could jeopardise full employment is diminished. 

Potential shift in the monetary policy cycle

It’s important to note that the RBA does not shift into a tightening cycle lightly. If the RBA does move to raise rates, it would signal that it sees long-term inflation dynamics emerging, not just a temporary overshoot. That would mark a meaningful shift in the monetary policy cycle. 

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