Inflation cooled more than expected in November. But rate cuts remain unlikely anytime soon

Annual inflation cooled in November.

The latest Australian Bureau of Statistics (ABS) consumer price index (CPI) report, released on Wednesday, shows inflation over the year to November was 3.4%, down from 3.8% a month earlier.

This 3.4% inflation rate was below many economists’ expectations.

The “trimmed mean” measure of underlying inflation, which takes out the items with the most extreme price changes, was 3.2% in November.

This measure is generally a better guide to the ongoing trend in inflation. It was only marginally changed from the 3.3% in October and 3.2% in September.

However, both measures remain above the Reserve Bank of Australia’s (RBA) 2-3% target band.

Where prices rose

Housing-related costs rose 5.2%, accounting for 1.1 percentage points of the total 3.4% increase in prices. The increase was particularly high in Queensland (up 12.2% in Brisbane) as the electricity rebate program there ended. The 4% increase in rents also contributed.

Meat prices also rose, with beef and veal prices up 11.4% and lamb and goat up 12.3%. The ABS attributed this to strong overseas demand for Australian red meat.

A lower global supply of coffee beans pushed up the price of coffee, tea and cocoa (grouped together by the ABS) by 15.3%. Among other large price rises were tobacco (up 12.2%), child care (up 11.2%) and education (up 5.4%).

On the other hand, there were only small increases in the prices of bread (up 0.6%), and the prices of poultry fell slightly (down 0.8%).

How will the RBA respond?

This is only the second complete monthly CPI issued. Previously, the monthly update was called an “indicator” because it covered fewer goods and services than the long-running quarterly CPI report.

The complete monthly CPI is not only new, but also more volatile than the long-running quarterly series. The RBA will therefore continue to pay more attention to the numbers for the December quarter. We now have data covering two months of this quarter.

By the time the RBA’s monetary policy board next meets, on February 2–3, it will have all three months of data (December figures will be released on January 28).

It looks like inflation in the December quarter will be around the 3.3% forecast by the RBA in October.

That forecast assumed the RBA’s key interest rate, the cash rate, would be cut from its current 3.6% in 2026. This assumption was based on expectations derived from the market conditions at the time. On that assumption, inflation was forecast to stay above the RBA’s 2-3% target band until 2027.

Given this, it was unsurprising the RBA held the cash rate steady at its board meetings in November and December.

Not too hot, not too cold

The minutes from its December meeting show the RBA now regards the cash rate as near its “neutral” rate. Sometimes called “r-star”, this is the “Goldilocks” level of interest rates that neither slows down nor speeds up the economy.

Financial markets have changed their view. Last year, they were expecting interest rates to fall during 2026. But prior to today’s inflation report, they had shifted to expecting the RBA to increase interest rates in 2026, perhaps as early as its next meeting, in February. They will probably now view this as less likely.

A survey of 38 prominent private sector economists by the Australian Financial Review before today’s release found that nine of them expected the cash rate to end this year below the current 3.6%.

Sixteen expected it to stay at 3.6%. And 13 expected the RBA to increase it (seven of whom expected an increase as early as February).

An increase in February would be an unusually rapid turnaround after the recent interest rate cuts. Generally, the RBA will hold rates steady for a longer time – perhaps a year or so – before reversing. It would want to avoid a situation where, after cutting rates last August, it raised them again in February but then had to cut again soon after.

I argue it is therefore more likely the RBA will hold for the next couple of meetings until they have a clearer read on whether inflationary pressures are truly building.

Among influences on inflation it will closely watch are wages, the unemployment rate and the exchange rate.

Treasurer Jim Chalmers is right to claim modestly that last month’s Mid-Year Economic and Fiscal Outlook (MYEFO) budget update was “not making this inflation challenge worse”.

But the modest reductions in deficits over coming years are unlikely to materially lower inflation, either.

Read more: The budget update shows a slight improvement in the federal deficit, but it's mostly due to good luck

What does this mean for mortgages?

The interest rates banks charge households for their home loans follow movements in the cash rate closely. If the RBA decides to hold steady for the first part of 2026, so, too, will mortgage costs.

Consumers may have overreacted in shifting from expecting their mortgage interest rates to be cut to expecting they will rise.