Electricity Costs Surge Following End of Government Subsidies
The conclusion of government subsidies has led to a 19% increase in electricity costs within a single month, resulting in power bills that are nearly one-third higher than they were a year ago.
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Reserve Bank Likely to Raise Rates Amid Persistent Inflation
The Reserve Bank of Australia (RBA) is increasingly expected to raise interest rates again, potentially twice before the end of 2026, following new data indicating that inflation shows no signs of easing.
Annual inflation remained elevated at 3.8% in January. This persistence is largely attributed to the cessation of federal and state government electricity subsidies, which caused electricity prices to climb by 19% in January alone, pushing power bills nearly 33% higher compared to the previous year.
The abrupt end of these electricity rebates has been a significant factor in the doubling of the headline inflation rate over just six months.
Even after adjusting for these volatile price changes, the Australian Bureau of Statistics (ABS) reported that the RBA's preferred measure of underlying inflation increased to 3.4% in the year to January, up from 3.3% in December.
Government Response and Economic Outlook
With the May budget approaching, which will serve as a critical test of the Albanese government's economic management, Treasurer Jim Chalmers acknowledged on Wednesday that inflation remains higher and more persistent than desired.
"Inflation is higher than we’d like and for longer than we’d like,"
"We know that these sorts of numbers are difficult news for people who are under pressure,"
"That’s why a big focus of the budget will be inflation, but also productivity … against the backdrop of this global economic uncertainty."
Inflation Impacting Essential Household Costs
Inflation continues to affect essential expenses that many Australian households find difficult to avoid. The ABS data revealed increases in the prices of necessities, including a 3.9% rise in rents and a 4.2% increase in medical and hospital services over the year to January.
Construction costs remain high and continue to rise rapidly, with homebuilding inflation accelerating to 3.5% in January from 3% in December.
Economic Analysis and Forecasts
Stephen Smith, a partner at Deloitte Access Economics, attributed the ongoing price pressures to what he described as "the political payback of a populist policy" by federal and state governments that subsidised energy prices starting mid-2023.
Smith indicated that the persistent strength in consumer price growth means a pre-budget rate hike remains a possibility.
"Unless the federal budget meets the moment and outlines significant economic and tax reform, growth will stagnate and inflation will persist for longer than necessary."
He further noted that the combination of relatively soft economic growth and high inflation characterises an economy grappling with low productivity growth, underscoring the urgency for reform.
Jo Masters, chief economist at investment bank Barrenjoey, pointed to "warning signals" that inflation could be more persistent than previously anticipated. She forecasted a rate hike in August, in addition to an expected increase in May.
Such moves would completely reverse the RBA's rate cuts delivered in 2025 and return the cash rate to its prior peak of 4.35%.
Factors contributing to this outlook include a low unemployment rate of 4.1%, accelerating domestic demand, high labour costs amid low productivity, and signs that the economy is operating beyond its capacity. These elements form a "broader economic picture" suggesting the central bank may need to raise rates more than earlier anticipated.
Market Expectations and Rate Hike Probabilities
Despite these developments, analysts and investors have remained relatively calm regarding the possibility of a rate hike as soon as March.
Financial markets have increased their expectations for a May rate hike to 95%, up from 84% prior to the release of the ABS data, according to National Australia Bank (NAB).
The probability of a second rate hike before the end of the year has also risen, climbing from approximately 40% to 60%.
