Australia’s Inflation Fight Isn’t Over, Energy Shock Pushes Prices Back Above Forecasts

Persistent Price Pressures Return

Australia’s full monthly inflation report revealed that price pressures are heating up again, running hotter than the Reserve Bank of Australia had anticipated. Headline inflation rose 3.8% in the year to October, above economists’ forecasts of 3.6%, while underlying inflation climbed to 3.3%, also beating expectations of 3.2%. These results point to persistent price pressures and suggest that inflation forecasts may need to be revised upward for the December quarter.

The main driver, unsurprisingly, was energy costs, which surged 37% after state energy rebates rolled off. Housing also remains a pain point, with costs rising 5.9% amid ongoing labour and material shortages. Overall, the data reinforces that inflation is proving more stubborn than the RBA hoped, potentially complicating the path to interest rate cuts in 2026.

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Australia’s Inflation Proves Structural as Rate-Cut Hopes Fade

Economists had previously viewed September’s inflation spike as temporary, but four consecutive months of stubbornly high readings now point to deeper, more structural pressures in the economy. If there is one clear takeaway, it is that predicting long-term inflation is nearly impossible, even the best economists often get it wrong. With rising global energy demand, particularly from power-intensive catalysts like data centres, there is a growing risk that energy costs will continue climbing.

At the same time, Australia’s labour market remains tight, with unemployment falling to 4.3%. Real-time banking data shows that economic activity, credit growth, and housing prices are all accelerating. This combination suggests the economy is running close to full capacity, leaving little room for growth without further fuelling inflation.

Because of this, expectations for further rate cuts have largely disappeared, and there is now early speculation about the potential for rate hikes in 2026. While the probability remains low, persistent cost pressures could make that scenario increasingly plausible. After three cuts this year, the Reserve Bank of Australia is unlikely to ease again anytime soon, and the risk of renewed tightening in 2026 has risen.

What this means for your portfolio

So what does this mean for your portfolio? Higher inflation typically reduces the likelihood of rate cuts, which in turn raises the equity risk premium that investors demand. In theory, this limits how much risk investors are willing to take. In practice, however, market behaviour can diverge from theory, especially as capital and disposable income rise among middle- and higher-income earners. Growth stocks, small caps with high debt, and property developers are usually the first to feel the pressure in this environment, while defensive sectors tend to outperform.

The key takeaway for investors is that inflation is proving stickier than expected. After strong market gains in recent years and consumer spending pushing the economy near full capacity, rate cuts are likely off the table for now. Instead, the risk of a rate hike is slowly becoming a more realistic consideration.