A 2026 interest rate cut may be a bridge too far with more economists seeing the 3.6% cash rate staying on hold for an extended period, with some forecasting more rate hikes, possibly as soon as the first half of next year
On Wednesday, the October CPI data showed annual inflation lifted to 3.8%, overshooting market expectations, while underlying inflation also rose to 3.3% for the 12 months to October, up from 3.2% the previous month.
Both figures are above the Reserve Bank's forecasts which had already been revised upwards earlier this month.
Markets are now expecting inflation to remain entrenched in 2026, with the October data showing it is increasingly persistent across a broad range of goods and services.
Why is inflation back?
The latest CPI reveals inflation is effectively back to where it was in June 2024.
It comes in the wake of the Reserve Bank delivering what's called an economic 'soft landing' - the difficult task of taming inflation without causing high unemployment or a recession.
But NAB economists point out soft landings come with their own challenges.
The Reserve Bank must now walk the tightrope of supporting economic growth while trying to keep inflation within its target zone.
"There is little cushion, nor tolerance, for above trend GDP growth because the expansion phase in a soft landing starts from a level of elevated capacity utilisation," said Sally Auld, NAB's group chief economist.
In other words, a relatively healthy economy can only grow so fast without running into problems.
Challenges ahead
NAB economists say the effective "cap" on growth has implications for both household and business sector incomes and profits growth, with "no short-term solution to the challenges".
As it is, a robust jobs market, along with three cuts to interest rates in 2025, has seen both household spending and wages increase, rekindling inflationary pressures.
NAB also notes new constraints on credit growth hitting financial sector earnings, with the banking regulator APRA introducing a new limit on high debt-to-income home lending.
NAB economists say there's growing evidence the economy is close to bumping up against such capacity constraints.
"We are confident in calling the RBA easing cycle as over."
NAB Economy Watch
When will interest rates go up again?
NAB joins the growing number of institutions and economists forecasting there may be a hike in the cash rate as early as next year.
"The soft landing dictates that any acceleration in growth and/or a tightening of the labour market from here will likely force the RBA to contemplate the need for rate hikes, possibly as soon as 1H26," the bank said.
NAB economists say over the long term, better productivity outcomes or higher labour supply growth can ease the current constraint.
But Australia's ongoing poor productivity shows little sign of major improvement, despite a slight uptick in the June quarter.
See also: Work more, produce less: Australia's productivity problem
September quarter productivity figures are due out next week, with the Australian National Accounts data scheduled for release on 3 December.
Over to the RBA
The Reserve Bank's monetary policy board is due to meet on 8-9 December to consider the latest data.
It's worth noting the October CPI data was the first monthly data to contain a full CPI, including a trimmed mean inflation reading, previously only released quarterly.
The Reserve Bank had cautioned the new-look monthly CPI would be more volatile and more difficult to interpret in its first 12 months and it would continue to rely on quarterly numbers.
Nonetheless, CBA economists expect the RBA may "switch to a more hawkish tone" or alternatively, "maintain a straight bat" given the uncertainty over how to read the new monthly data series.
Meantime, Westpac economists say unlike the market, they weren't surprised by the uptick in inflation but see little that will sustain the current inflationary pulse into 2026.
Swimming against the tide, Westpac said it is currently sticking with its forecast of another cut to the cash rate in 2026.
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