Dec 2025 CPI Data: Interest Rate Expectations Shift as Inflation Surges

Interest Rate Expectations Shift Rapidly as Inflation Surges

The pivot in expectations from rate cuts to rate hikes happened fast last year, and accelerated again in January, after a low unemployment number, and today’s hot CPI number confirms it all. Before today’s inflation data, the market had priced in a 56% chance of a rate hike at February’s meeting. With the trimmed mean measure coming in above market expectations, and no more significant data coming before next week’s RBA decision, that 0.25% rate hike is now pretty much locked in.

Markets increased the odds of a February hike to 73% immediately.

Inflation Levels Exceed RBA Comfort Zone

Underlying inflation (based on the quarterly series) now sits at 3.4%, ahead of the RBA forecasts, and is 3.9% annualised for the most recent 6 months.

Essentially, far too high for the RBA to be comfortable with holding rates at current levels. So, the rate cut cycle was short and sweet and quickly (partially) reversed.

It was one of the shallowest easing cycles in more than 30 years.

Property Market Sentiment and the Impact of Rate Changes

For property markets, the impact on sentiment will be immediate. The sugar hits expected only 4 or 5 months ago haven’t materialised, and this reverse undoubtedly tempers the 2026 outlook.

Economic Strength Supports a Positive 2026 Outlook

On the positive side, the reason we’re here is because the economy is running hotter than expected, with rising consumer spending, a tight labour market and population growth that looks to have stabilised and possibly increasing again.

The impacts of last years’ rate cuts will still be filtering through. Mortgage holders and potential purchasers will be dealing with rates 0.5% lower than they were at the same time last year and the economy generally is performing well.

The outlook for property markets in 2026 remains positive, for both land and established housing markets.

‍